# Financial Management

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MBA-622 FINANCIAL MANAGEMENT
ASSIGNMENT
Junior Sayou, a financial analyst for Chargers Products, a manufacturer of stadium benches, must evaluate the risk and return of two assets, X and Y. The firm is considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, Junior gathered data on the annual cash flow and beginningand end-of year values of each asset over the immediately preceding 10 years, 2002– 2011. These data are summarized in the table below. Junior’s investigation suggests that both assets, on average, will tend to perform in the future just as they have during the past 10 years. He therefore believes that the expected annual return can be estimated by finding the average annual return for each asset over the past 10 years.

Return Data for Assets X and Y, 2002 - 2011 Asset X Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Cash Flow \$1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 Value Beginning End \$20,000 \$22,000 22,000 21,000 21,000 24,000 24,000 22,000 22,000 23,000 23,000 26,000 26,000 25,000 25,000 24,000 24,000 27,000 27,000 30,000 Cash Flow \$1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200 2,300 2,400 Asset Y Value Beginning End \$20,000 \$20,000 20,000 20,000 20,000 21,000 21,000 21,000 21,000 22,000 22,000 23,000 23,000 23,000 23,000 24,000 24,000 25,000 25,000 25,000

Junior believes that each asset’s risk can be assessed in two ways: in isolation and as part of the firm’s diversified portfolio of assets. The risk of the assets in isolation can be found by using the standard deviation of returns over the past 10 years. The capital asset pricing model (CAPM) can be used to assess the asset’s risk as part of the firm’s portfolio of assets. Applying some sophisticated quantitative techniques, Junior estimated betas for assets X and Y of 1.60 and 1.10, respectively. In...

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