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Risk and Return 2

CP purchased shares 5 years ago for £100 each. Over the 5 years, dividends were paid and share price increased. To calculate average annual return, use the formula: (End Value - Initial Cost) / Initial Cost / No. of Years. Risk is measured by standard deviation, which measures dispersion of returns around the average. For two securities with uncertain returns, expected return considers probability and return in each state. Security with higher expected return but lower risk should be selected.

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Nitya Bhakri
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34 views

Risk and Return 2

CP purchased shares 5 years ago for £100 each. Over the 5 years, dividends were paid and share price increased. To calculate average annual return, use the formula: (End Value - Initial Cost) / Initial Cost / No. of Years. Risk is measured by standard deviation, which measures dispersion of returns around the average. For two securities with uncertain returns, expected return considers probability and return in each state. Security with higher expected return but lower risk should be selected.

Uploaded by

Nitya Bhakri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CP

VAhas purchased shares at ?100 each five vears ago. The market price at the ena or
risk r and dividend
risk of security. during the year are given
below. Find of return and the
average rate
Year Dividend () Market Price ()
106
120
124
130
5
3 140
T h e following two securities have
been shortlisted by investor
Return on Security
Y
Probability
10% 5%
% 8%
-5% 2%
.2
Which security should be selected and why ?
(eD The returrne on two securities under four possible states of nature are given below:
State of Näture Probability Return on Security Return on Securlty
A (o) B ()
0.2
2 0.4 9 10
3 0.3 14 18
0.1 18 28
Find
(i) Expected Retårn on Security A and Security B.
(i) Risk (in terms ofStandard Division) on Security A and B..
(ii) Covariance between the returns on Security Aand B.
Civ) Coefflecient of correlation between the returns on Security A and B.
y The return on two securities X and Z are given below. Which security would you
8elect for an investorwho has an appetite for a high risk and return?
Roturn on Security
X Probability
6% 1%
4 3%
0 3% .

An investtment is curtently traded at ? 23-50 per unit. There is an uncertainty of


5
the return and following infortmation is gathered in this respect under
differenteconomic conditions Year-end Price
Eco. Condition Prol Return
Good 35 4 40 35
30 400 27
Normal
Dull 35 4:00 15
calculate the risk.
Pindout the expected value of return for one-year period. Also
Mr. Gupta makes an investment at 50. The yoar-end price of this investment under
different market conditions with equal probabilities is as followe:
Condition Year-end Price ()
Bullish 75
Normal 60
Bearish 45
and risk (o) of the return.
() Find out the expected value of return for one year period
(ii) Also çalculate Inflation Adjusted Return if rate of inflation during the year is 8%.
AN
xettrh.oh Tra bahldy
N e. Secutty A *** * **

A P .XAPKA-¥Ax.

A=YA.P.
S4ndavd Aevnhoh. ot SecaityAA- = - A ) XP

xeturho Tnlty
hatuve Secuvi ty B
KB p.P -(Ks-YoxP

Stdard deviaho' at SecuYity B3 XE-

Se o
habure A XA Ar P

Couarace tA=*hJ{Kp=¥ay{-
S+audaxd.deviaho Se.cuity A oA
Standavddevisiey..at SecuyltyB2
Coeceat_ot_Corelahs

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