3. Genetech, a U.S. firm, plans to invest a new project in either the United Sta

Question

3. Genetech, a U.S. firm, plans to invest a new project in either the United States or U.K. Once completed, it will continue 35% of the firm's total funds invested in itself. The remaining 65% of its investment in its business is exclusively in the U.S. Characteristics of the proposed project are forecasted for a 3-year period for both a U.S. and a British location as follows: CHARACTERISTICS OF PROPOSED PRO Existing Business 20% 0.1 IF LOCATED IN THE UNITED ATATES 25% 0.09 IF LOCATED UNITED KIN 25% 0.11 Mean e annual return on investment (after taxes d deviation of expected annual after-tax returns on Correlation of expected annual after-tax returns on investment 0.8 -0.3 U.S. business What will be your suggestion for Genetech for the project location? (1.5 Points) a. It shall locate in the US. because the standard deviation is 9.65%, smaller than that b. It shall locate in the US. because the standard deviation is 5.45%, smaller than that c. It shall locate in the UK because the standard deviation is 7.21%, smaller than that d. It shall locate in the UK because the standard deviation is 6.49%, smaller than that located in the UK, which is 10.35%. located in the UK, which is 10.05%. located in the U.S., which is 9.35%. located in the U.S., which is 9.22%. Calculation Ste

Explanation / Answer

Soln : From the table we can see that the return is same for both combination i.e existing business and US or UK investment.

So, investment decision will be beased on the correlation and standard deviation factor.

Let S be the standard deviation of the portfolio (exisiting + US or UK), need to calculate for both

Lets say if invested in US

S2 = (0.35*0.1)2 + (0.65*0.09)2 +2*0.35*0.1*0.65*0.09*correlation factor.....................(correlation factor with US = 0.8)

S2 = 0.007923

or S = 0.089 = 8.9%

Similarly for UK investment

S2 = (0.35*0.1)2 + (0.65*0.11)2 +2*0.35*0.1*0.65*0.11*correlation factor......................(correlation factor with US = -0.3)

S2 = 0.004836

or S = 6.95%

The nearest answer is D i.e UK investment to be done as combined standard deviation is lower than US investment.

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