PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Question
Chapter 11, Problem 4P
(a)
To determine
Determine the maximum average expected return.
(b)
To determine
Determine the expected return if the investment is $500 in each stock.
(c)
To determine
Determine why the strategy of investing $500 in each stock is more acceptable, even if it does not give the highest possible average expected return.
(d)
To determine
Determine an investment strategy that guarantees at least 4.4% return
(e)
To determine
Determine an investment strategy that is riskless.
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You are a financial planner. One of your clients is 40 years old and wants to begin saving for retirement. You advise her to put $5,000 a year into the stock market. You estimate that the market's effective return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year. What is the value of her savings after 20 years.You are a financial planner. One of your clients is 40 years old and wants to begin saving for retirement. You advise her to put $5,000 a year into the stock market. You estimate that the market's effective return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year. What is the value of her savings after 20 years.
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You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain.
a) What is the expected value of your earnings from investing in Ford stock?
b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?
You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a
McDonald's or a Penn Station East Coast Subs franchise. McDonald's indicates that, based on the location where you
are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the
initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent
probability that profits will be -$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for
a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent
probability, and -$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of
these two investment opportunities, which is the better investment? Explain carefully.
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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