You have been asked to analyse Grand Plomp Ltd, a maker of rocket widgets used by NASA.The owners are wondering whether the return received is sufficient to justify the risks taken in each division. You are to consider both divisional risk and return in your analysis and the following information has been collected from the past fifteen years to use in your n your analysis.
|
|
Percent
|
Risk Measure %
|
Average
|
|
|
Division
|
of Rocket
|
Standard
|
Beta
|
Annual Rate
|
|
|
|
Widgets
|
Deviation
|
|
of Return (%)
|
|
|
A
|
10
|
12
|
1.1
|
10
|
|
|
B
|
20
|
36
|
1.2
|
20
|
|
|
C
|
30
|
14
|
0.8
|
8
|
|
|
D
|
40
|
15
|
0.9
|
15
|
|
|
|
|
|
|
|
- Average annual market return: 12 per cent
- Average annual risk-free rate: 8 per cent
Using standard deviation and beta measures of risk, you are to rank projects in terms of their risk-adjusted return. Those divisions providing the lowest risk per unit of return would be preferred. An analysis can be conducted using a 'total' definition of risk, or standard deviation, and an 'undiversifiable' definition or risk, or beta.
Given the beta, it is possible to measure the required rate of return. Furthermore, given the proportion of each division within Global Gears, it is possible to calculate the firm beta, return and risk-adjusted return. With this information, it is possible to determine whether Global Gears, as a whole, provides a sufficient return to justify the risks taken by its investors.
You are required to:
- Locate the relevant information
- Select the proper tool or equation
- Organise and manipulate the data
- Explain the solution