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Douglas Keel, a financial analyst for Orange Industries

Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000; investment Y had a market value of $55,000. During the year, investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current market values of investments X and Y are $21,000 and $55,000, respectively.

a. Calculate the expected rate of return on investments X and Y using the most recent year's data.

b. Assuming that the two investments are equally risky, which one should Douglas recommend? Why?

Solution Preview

Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates ...

Solution Summary

This solution is comprised of a detailed explanation to calculate the expected rate of return on investments X and Y using the most recent year's data.

$2.19