Boyd Inc., a U.S. firm, plans to invest in a new project that will be located ei

Question

Boyd Inc., a U.S. firm, plans to invest in a new project that will be located either in Venezuela or in Colombia. If the Venezuelan project is selected, it will constitute 45% of the firm's total funds invested in itself. If the Colombian project is selected, it will constitute only 15% of the firm's total funds. Assume the U.S. risk free rate is 4%. You have the following data on expected returns for each project:

a) Based on the Sharpe Ratio, which project would you recommend to Boyd?

b) Based on the Treynor Ratio, which project would you recommend to Boyd?

c) Is Boyd, under both criteria, better off without adding any project?

Venezuela 25% 30% .40 45 1.20 Boyd Colombia Expected return Standard deviation Correlation with existing Boyd's portfolio Weight on overall portfolio Beta 11% 20% 1.00 35% 55% 10 15 1.40 0.90

Explanation / Answer

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a. Based on sharpe ratio Venezuela project is better,as it has high return for same risk.

b. based on treynor ratio, Columbia one is better as it has high reward to volatility.

c.Yes, Boyd will be better off in both condition as it will increase the return for same risk and volatility in both the cases.

Boyd venezuala Columbia Expected Return 11.00% 25.00% 35.00% Std. dev 20.00% 30.00% 55.00% Correaltion with existing boyd project 1 0.4 0.1 Weight on Overall portfolio 0.45 0.15 Beta 0.9 1.2 1.4 Rsik free rate 4% Sharpe Ratio 0.35 0.70 0.56 Treynor ratio .08 0.18

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