The Allied Group has acquired Kramer Industries and is now considering additional investments. They have determined that there is a firm that is a good fit for their portfolio, the Kramer firm of Montana. The firm was established in 1990 and has the following historical returns:Kramer IndustriesYearEarnings1990(8% Loss)199523%200026%200531%201018%Questions: Address all of the following questions in a brief but thorough manner.What was the average return for the stock over the period of 1990 through 2010?What was the standard deviation for the stock over this period?Justified whether or not the company should be purchasedAssume that you currently have a portfolio that returns 19.5%. If you add this stock to the current portfolio, what would happen to the average return on the portfolio?Correctly identified the result of adding Kramer to your existing portfolio.Should Allied invest in the stock? Justify your response.

Introduction:

The Allied Group is a company that has recently acquired Kramer Industries and is now contemplating additional investments. Kramer Industries is a firm that seems to fit well into their portfolio. The firm was founded in 1990 and has had varying returns over the years. The Allied Group is considering whether or not they should acquire the Kramer firm of Montana.

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Description:

The Kramer firm of Montana has been in existence for over three decades and has a track record of earnings that the Allied Group is considering. The firm incurred an 8% loss in 1990, but in subsequent years, it has had positive returns with the highest being at 31% in 2005, and the lowest being at 18% in 2010. Given the historical returns, the Allied Group would like to know if the Kramer firm is a good investment. This essay will examine the historical returns of the stock, calculate its average return, standard deviation, and evaluate the company’s decision to invest in the stock.

Average Return and Standard Deviation:

The average return on Kramer stock from 1990 to 2010 can be calculated by adding up all the returns from 1990 to 2010 and dividing the sum by 21, which is the number of years. Thus, the average return for the stock from 1990 through 2010 will be (23+26+31+18)/4 = 24.5%.

The standard deviation is a measure of the stock’s volatility; it tells us how much the stock’s returns have varied from its average return. The formula for standard deviation is the sum of the squared difference of returns from the average divided by the number of years minus one. Thus, the standard deviation for the Kramer stock over this period will be √[((0.23-0.245)² +(0.26-0.245)² +(0.31-0.245)² +(0.18-0.245)²)/3] = 0.534.

Justification for Acquiring Kramer:

If the Kramer stock is added to an existing portfolio that returns 19.5%, the average return on the portfolio will be (19.5 + 24.5)/2 = 22%. Since the average return on the portfolio increases, adding Kramer to the existing portfolio would be beneficial.

Whether or not the Allied Group should invest in the Kramer stock will depend on their investment objectives and risk tolerance. If their goal is to maximize returns and they are comfortable with the risks associated with the stock, they should acquire the firm. However, if their goal is to minimize risks, they might be better off without the Kramer stock. Since the Kramer stock’s standard deviation is relatively high, it indicates that the stock is volatile and has a greater degree of risk. Ultimately, the decision to buy the Kramer stock will depend on the Allied Group’s investment objectives, risk appetite, diversification needs, and market forecasts.

Objectives:

– To understand the historical returns of Kramer Industries from 1990 to 2010.

– To determine the average return and standard deviation of the stock over the given period.

– To evaluate whether or not the company should be purchased by Allied Group.

– To calculate the impact of adding the stock of Kramer Industries to the current portfolio.

– To make a justified recommendation on whether or not Allied Group should invest in the stock.

Learning Outcomes:

By the end of this analysis, the learners will be able to:

– Calculate the average return and standard deviation of a stock based on historical data.

– Evaluate the suitability of a company for investment based on its historical returns and other relevant factors.

– Understand the impact of adding a stock to an existing portfolio and calculate the resultant average return.

– Make a well-supported recommendation on whether or not to invest in a stock.

Average Return and Standard Deviation of Kramer Industries:

The average return for Kramer Industries over the period of 1990 through 2010 is calculated as follows:

(23% + 26% + 31% + 18% – 8%) / 5 = 18%

The standard deviation of the stock over this period is calculated using the following formula:

sqrt [∑(xi – x̄)^2 / (n-1)]

where xi is the return for a particular year, x̄ is the mean return, and n is the number of years.

By plugging in the values, we get:

sqrt [(-8 – 18)^2 + (23 – 18)^2 + (26 – 18)^2 + (31 – 18)^2 + (18 – 18)^2 / (5-1)]

= 15.59%

Should the Company be Purchased?

To determine whether or not Kramer Industries should be purchased, other relevant factors such as the company’s financial health, industry trends, and strategic fit with Allied Group should be considered. The historical returns alone cannot be used as the sole basis for purchasing the company.

Impact of Adding Kramer Industries to Existing Portfolio:

Assuming the current portfolio returns 19.5%, the average return on the portfolio after adding Kramer Industries can be calculated as follows:

(19.5% + 18%) / 2 = 18.75%

Recommendation on Investing in Kramer Industries:

Based on the limited information given, a comprehensive analysis of Kramer Industries is needed to make a well-supported recommendation. The historical returns and the impact on the current portfolio should be considered along with other factors before making a decision on investment.

Solution 1:

Calculations:

– To find the average return for the stock over the period of 1990 through 2010, we add up all the earnings and losses from each year and divide by the number of years. Total earnings and losses = -8 + 23 + 26 + 31 + 18 = 90. Number of years = 5. Average return = 90 / 5 = 18%.

– To find the standard deviation for the stock over this period, we first find the mean return (same as the average return from above). Then, we find the difference between each year’s return and the mean return, square those differences, add up the results, divide by the number of years, and take the square root of the answer. The mean return is 18%. Difference from mean for each year: -26%, 5%, 8%, 13%, -0.5%. Squared differences: 676, 25, 64, 169, 0.25. Sum of squared differences = 934.25. Number of years = 5. Standard deviation = square root of (934.25 / 5) = 10.85%.

Justification for purchasing:

– The historical returns for Kramer Industries show that the firm has had positive returns in four out of five years since 1995.

– The average return of 18% is higher than the current portfolio’s return of 19.5%, indicating that adding the stock could potentially increase the overall return of the portfolio.

– However, the high standard deviation of 10.85% suggests that the stock carries a significant amount of risk.

Solution 2:

Calculations:

– The average return for the portfolio with the current return of 19.5% and the additional stock with an average return of 18% is (19.5 + 18) / 2 = 18.75%.

Result of adding Kramer to portfolio:

– Adding the Kramer stock could potentially increase the overall return of the portfolio since the average return of 18.75% is higher than the current return of 19.5%. However, this also depends on the weighting of the stock in the portfolio and the level of correlation it has with the other stocks.

Justification for investing:

– The decision to invest in Kramer Industries should be based on a more thorough analysis of the firm’s financials, its position in the industry, and the potential for future growth.

– Factors such as the current economic climate, market trends, and competitors should also be considered.

– Additionally, the investor’s risk tolerance and investment strategy should be taken into account when deciding whether or not to invest in this stock.

Suggested Resources/Books:

– “Investments” by Zvi Bodie, Alex Kane, and Alan J. Marcus

– “The Intelligent Investor” by Benjamin Graham

– “A Random Walk Down Wall Street” by Burton Malkiel

Similar Asked Questions:

1. What is the average return for a stock over a certain period of time?

2. How do you calculate the standard deviation for a stock?

3. How do you determine if a company is a good fit for an investment portfolio?

4. What happens to the average return on a portfolio when a new stock is added?

5. How do you justify a decision to invest in a specific stock or company?

Average Return and Standard Deviation Calculation:

– To calculate the average return for Kramer Industries stock from 1990 to 2010, we add up the returns from each year and divide by the number of years: (-8 + 23 + 26 + 31 + 18)/5 = 18%.

– To calculate the standard deviation for the same period, we first need to find the deviation from the average return for each year (e.g. -26% – 18% = -44%). We square each deviation, sum them, divide by the number of years, and then find the square root of that number: SQRT[(8-18)^2 + (23-18)^2 + (26-18)^2 + (31-18)^2 + (18-18)^2]/(5-1) = 12.26%.

Should the Company be Purchased:

– It is difficult to determine whether or not the company should be purchased based solely on its historical returns. Further research into the company’s financials, management, industry trends, and competitive landscape would be necessary before making a decision.

Effect of Adding Kramer to Existing Portfolio:

– If we assume a current portfolio return of 19.5% and add Kramer Industries with an 18% average return, our new portfolio return would be: (19.5 + 18)/2 = 18.75%.

Justification for Investing in Kramer Industries:

– Again, further research would be necessary to fully justify investing in Kramer Industries. However, the company’s historical returns could be a positive sign and warrant further investigation into the company’s potential for growth and future returns. It is important to also consider the level of risk associated with investing in the company and whether it aligns with the investor’s overall investment strategy and goals.

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