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May 24, 2023

Understanding Investment Decisions in Finance

  1. The risk-free return is independent of the state of the economy because it is typically associated with investments in assets such as Treasury bills (T-bills), which are considered to have virtually no default risk. The return on T-bills is determined by the prevailing interest rates set by the Federal Reserve and is not directly influenced by the performance of the economy or financial markets. However, in the real world, T-bills may not promise a completely risk-free return as there is always a possibility, albeit very low, of default by the government issuing them.

  2. High Tech`s returns are expected to move with the economy because it operates in the electronics industry, which tends to be sensitive to overall economic conditions. When the economy is performing well, there is typically increased demand for electronic products, leading to higher revenues and profits for High Tech. On the other hand, Collections` returns are expected to move counter to the economy because it collects past due debts, which may increase during economic downturns when individuals and businesses face financial difficulties.

  3. I will calculate the expected rate of return on each alternative and fill in the row for in the table.

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