Suppose that stock prices are showing mean-reversion

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Reference no: EM131991875

1. Suppose that stock prices are showing mean-reversion (i.e., if the stock price have moved too far from some mean value, then it is more likely to go back towards the mean instead of going further away from the mean). Then you are believing in

a) fundamental analysis

b) insider trading

c) technical analysis

d) None of these answers are correct.

2. XYZ, Inc. is considering a 5 year, 12% WACC capital budgeting project under three scenarios. If conditions are excellent, the cash flows from this project are expected to be $4,000 per year; under fair conditions, cash flows are projected at $2,500 per year; and under unfavorable conditions, cash flows are projected at ($600) per year. The initial investment outlay is $3,000 and the probabilities of these three conditions are 30%, 50% and 20%, respectively. Assume that XYZ has the option to abandon this project in the second year if conditions are unfavorable. It could do so by selling this project to another company at a price of $1,500 in year 2 and consequently cash flows would be 0 in years 3 and beyond. Calculate the standard deviation given the abandonment option and choose an answer below.

$3,766.51

$4,766.51

$5,766.51

$6,766.51

Reference no: EM131991875

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