solution

Calculate a? one-year holding period return? (HPR) for the following two investment? alternatives:

Investment

X

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Y

Cash received

1st quarter

?$0.68

?$1.92

2nd quarter

?$0.23

?$1.92

3rd quarter

?$0.35

?$1.92

4th quarter

?$2.67

?$1.92

Investment value

Beginning of year

?$20.17

?$54.63

End of year

?$23.45

?$59.84

?(Click on the icon located on the? top-right corner of the data table below in order to copy its contents into a?spreadsheet.)

Which investment would you? prefer, assuming they are of equal? risk? Explain.

The HPR for investment X is

? HPR for investment Y is

?Which, if? any, of the return components is likely not to be realized if you continue to hold each of the investments beyond 1?year? ? (Choose the best answer? below.)

A.

If the investments are held beyond 1? year, only the current income on Investment Y would not be? realized; the current income on Investment X would be realized because these cash flows occur earlier in the investment period.

B.

If the investments are held beyond 1? year, the capital gain? (loss) component would not be realized and would likely change.

C.

If the investments are held beyond 1? year, only the capital loss on Investment X would not be? realized; the capital gain on Investment Y would be realized.

D.

If the investments are held beyond 1? year, the current income component would not be realized and would likely change.

Which investment would you? prefer, assuming they are of equal? risk? ? (Choose the best answer? below.)

A.

Investment Y would be preferred since it offers a capital? gain, while investment X would not be preferred due to the capital loss.

B.Investment X would be preferred since it offers more? intra-year cash flows

?($0.68?,

?$0.23?,

and

$2.67

for X versus

?$1.92

for? Y).

C.Investment

X

would bepreferred since it offers the higher holding period return.

D.Investment

Y

would be preferred since it offers the larger capital gain? (loss).

 
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