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Martin Products Demand and Returns Analysis

This document contains two tables that analyze the expected returns and risks of investments in two companies, Martin Products and US Water. The tables show the probability and expected returns under different economic conditions. For Martin Products, the expected return is 10% but the risk, measured by standard deviation, is 54%. For US Water, the expected return is also 10% but the risk is lower at 4%.

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sadia anmol
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23 views12 pages

Martin Products Demand and Returns Analysis

This document contains two tables that analyze the expected returns and risks of investments in two companies, Martin Products and US Water. The tables show the probability and expected returns under different economic conditions. For Martin Products, the expected return is 10% but the risk, measured by standard deviation, is 54%. For US Water, the expected return is also 10% but the risk is lower at 4%.

Uploaded by

sadia anmol
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Example 8-1

Martin Products

State of Economy Probability of this demand Rate of return Product


P R P*R
Strong 0.3 80% 0.24
Normal 0.4 10% 0.04
Weak 0.3 -60% -0.18
Expected Return 10%
Rhat
US water

State of Probability of
Economy this demand Rate of return Product
P R P*R
Strong 0.3 15% 5%
Normal 0.4 10% 4%
Weak 0.3 5% 2%
Expected Return 10%
Table 8-2

Martin Products

State of Economy Probability of this demand Rate of return Deviation (Actual -Expected Return)
P R R -Rhat
Strong 0.3 80% 70%
Normal 0.4 10% 0%
Weak 0.3 -60% -70%
Expected Return

US Water

State of Economy Probability of this demand Rate of return Deviation (Actual -Expected Return)
P R R -Rhat
Strong 0.3 15% 5%
Normal 0.4 10% 0%
Weak 0.3 5% -5%
Expected Return
Deviation Squared Deviation (Actual -Expected Return)
(R -Rhat)^2 P((R -Rhat)^2)
0.49 0.147
0 0 Step 2
0.49 0.147
Varience 29%

Standard Deviation 54%

MP US
Return 10% 10%
Risk 54% 4%

Deviation Squared Deviation (Actual -Expected Return)


(R -Rhat)^2 P((R -Rhat)^2)
0.0025 0.00075
0 0
0.0025 0.00075
Varience 0.0015

Standard Deviation 4%
Company X

Year Rate of Return Deviation (Actual - Realized Return) Squared Deviation

2005 30% 19.8% 3.9%


2006 -10% -20.3% 4.1%
2007 -19% -29.3% 8.6%
2008 40% 29.8% 8.9%
Average (r-Bar) 10.25% 25.4%
Varience 8.5%
StnadardDevaition 29%
Company Y

Year Rate of Return Deviation (Actual - Realized Return)

2005 50% 54%


2006 -25% -21%
2007 -30% -26%
2008 -10% -6%
-4%
Varience
SD
13.89744
13.9
Squared Deviation

29%
5%
7%
0%
41%
14%
37%
Probability
0.1
0.2
0.4
0.2
0.1

Probability
0.1
0.2
0.4
0.2
0.1
(X Return) Expected Return
-10% -1%
2% 0%
12% 5%
20% 4%
38% 4%
12%

Y Expected Return
-0.35
0
0.2
0.25
0.45

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