Company wants to make investments in the financial market using its cash surpluses. The financial manager selects two assets (A and B) to be analyzed. Asset A has the expected return of 20% and the standard return deviation of 16%. Asset B has an expected return of 26% and standard return deviation of 25%. How did the manager get to these estimated values? Explain the operational.

The financial manager likely arrived at the estimated values for assets A and B through a combination of financial analysis, historical data, and possibly some market research. Here's how the manager might have operationalized this process: Expected Return Estimation: Expected return is a measure of the mean or average return that an asset is expected to generate over a specific period. It can be estimated using historical data and/or fundamental analysis. Historical data: The manager may have looked at historical returns for assets A and B, possibly over several years, to calculate an average return. For example, if Asset A consistently returned around 20% over the past five years, the manager might use 20% as the expected return. Fundamental analysis: The manager may have analyzed the financial health, growth prospects, and expected cash flows of companies or assets represented by A and B to estimate their future returns. For example, if Asset B represents shares in a company with strong growth prospects and high expected profits, a higher expected return like 26% might be justified. Standard Deviation Estimation: Standard deviation measures the volatility or risk associated with an asset's returns. Higher standard deviation implies greater risk. Historical data: To estimate the standard deviation, the manager would analyze the historical returns for assets A and B. A higher standard deviation for Asset B (25%) suggests that its returns have been more volatile than Asset A (16%). Market research: The manager may have considered external factors affecting the volatility of these assets, such as industry trends, economic conditions, or geopolitical events. Diversification Benefits: The manager may also have considered the potential benefits of combining these assets in a portfolio. Diversification can reduce the overall risk of the portfolio by combining assets with lower correlation. This can be calculated based on historical correlations or estimated based on the nature of the assets. Market Expectations: The manager might take into account current market conditions and expectations. For example, if the broader market is expected to perform well, this might influence their estimation of expected returns for both assets.