Mini Case for Finance

In: Business and Management

Submitted By smal0603
Words 2568
Pages 11
4/27/2003 CHAPTER 4 MINI CASE
SITUATION
Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1 year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associtated outcomes.

Barney Smith's economic forecasting staff has developed estimates for the state of the economy and its security analyst have developed a sophisticated computer program which was used to estimate the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and American Foam manufactures mattresses and various other foam products. Merril Finch also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund, and thus obtain average stock market results. Given the situation as described, answer the following questions.

State of Economy Probability T-Bills Alta Inds. Repo Men American Foam Market Port. 2-Stock Portfolio
Recession 0.1 8.00% -22.00% 28.00% 10.00% -13.00% 3.00%
Below Average 0.2 8.00% -2.00% 14.70% -10.00% 1.00%
Average 0.4 8.00% 20.00% 0.00% 7.00% 15.00% 10.00%
Above Average 0.2 8.00% 35.00% -10.00% 45.00% 29.00%
Boom 0.1 8.00% 50.00% -20.00% 30.00% 43.00% 15.00% Return on Investment…...

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