Douglas Keel, a financial analyst for orange Industries wishes to estimate the rate o return for two similar risk investments X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of 20,000 and investment Y had a market value of 55,000. During the year, investment X generated cash flow of 1,500 and investment Y generated cash flow of 6,800. The current market values of investments X and Y are 21,000 and 55,000 respectively.
a. Calculate the expected rate of return on investments X and Y using the most recent year's data.
b. Assuming that the two investments are equally risky, which one should Douglas recommend? Why