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risk & return ws

The document contains various financial calculations and scenarios related to holding period returns, expected returns, and standard deviations for different stocks and investments. It includes examples of calculating expected returns based on probabilities, investment outcomes, and comparisons between different assets. Additionally, it discusses the Capital Asset Pricing Model (CAPM) and the required rate of return for specific firms based on their beta values.

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10 views

risk & return ws

The document contains various financial calculations and scenarios related to holding period returns, expected returns, and standard deviations for different stocks and investments. It includes examples of calculating expected returns based on probabilities, investment outcomes, and comparisons between different assets. Additionally, it discusses the Capital Asset Pricing Model (CAPM) and the required rate of return for specific firms based on their beta values.

Uploaded by

akirapure2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1) The prices for the Guns and Hoses Corporation for the first quarter of 1992 are given

below. Find the holding period return for February.


Month End Price
January $135.28
February $119.40
March $141.57

2) You bought Chemtron stock for $45 a year ago. It is selling for $54 today. What is your
holding period return?

3) The stock of Business Adventures sells for $40 a share. Its likely dividend payout and
end-of-year price depend on the state of the economy by the end of the year as
follows:

Stock
Dividend
Price
$
Boom $ 2.00
52
Normal
1.40 44
economy
Recession 0.70 34

Calculate the expected holding-period return and standard deviation of the holding-period
return. All three scenarios are equally likely.

4) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a
40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the
expected rate of return?

5) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a
40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what would be
the standard deviation?
6) You are considering investing in a project with the following possible outcomes:
Probability of Investment
States Occurrence Returns
State 1: Economic boom 15% 16%
State 2: Economic growth 45% 12%
State 3: Economic decline 25% 5%
State 4: Depression 15% -5%
Calculate the expected rate of return and standard deviation of returns for this investment.

7) Use the following information, which describes the expected return and standard deviation
for three different assets, to answer the following question(s).

Asset X Asset Y Asset Z


Expected return 9.5% 8.8% 9.5%
Standard deviation 4.9% 5.5% 5.5%

7.1) If an investor must choose between investing in either Asset X or Asset Y, then:
A) she will always choose Asset X over Asset Y.
B) she will always choose Asset Y over Asset X.
C) she will be indifferent between investing in Asset X and Asset Y.
D) none of the above.

7.2) If an investor must choose between investing in either Asset X or Asset Z, then:
A) he will always choose Asset X over Asset Z.
B) he will always choose Asset Z over Asset X.
C) he will be indifferent between investing in Asset X and Asset Z.
D) none of the above.
8) Your broker mailed you your year-end statement. You have $25,000 invested in Dow
Chemical, $18,000 tied up in GM, $36,000 in Microsoft stock, and $11,000 in Nike. The
annualized returns for these stocks is 16.5% for Dow, 12.0% for GM, 18.5% for Microsoft, and
15.3% for Nike. What is the return of your entire portfolio?

9) What is the expected return of the three stock portfolio described below?

Common Stock Market Value Expected Return


Ando Inc. 95,000 12.0%
Bee Co. 32,000 8.75%
Cool Inc. 65,000 17.7%

10) USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Asset (A) Asset (B)


E(RA) = 10% E(RB) = 15%
(A) = 8% (B) = 9.5%
WA = 0.25 WB = 0.75
CovA,B = 0.006

What is the expected return of a portfolio of two risky assets if the expected return E(Ri),
standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above?

What is the standard deviation of this portfolio?


11) USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Asset 1 Asset 2
E(R1) = .12 E(R2) = .16
E(1) = .04 E(2) = .06

Calculate the expected return and expected standard deviation of a two stock portfolio when r1,2 =
.60 and w1 = .75.
a. .13 and .0024
b. .13 and .0455
c. .12 and .0585
d. .12 and .5585
e. .13 and .6758

12) Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65.
Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate
the covariance between these two securities.
a. 300
b. 461.54
c. 261.54
d. 195
e. 200

13) If you hold a portfolio made up of the following stocks:


Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
What is the beta of the portfolio?
A) 1.17
B) 1.14
C) 1.32
D) Can't be determined from information given
14) Siebling Manufacturing Company's common stock has a beta of .8. If the expected risk-free
return is 7% and the market offers a premium of 8% over the risk-free rate, what is the expected
return on Siebling's common stock?
A) 7.8%
B) 13.4%
C) 14.4%
D) 8.7%

15) Huit Industries' common stock has an expected return of 14.4% and a beta of 1.2. If the
expected risk-free return is 8%, what is the expected return for the market (round your answer to
the nearest .1%)?
A) 7.7%
B) 9.6%
C) 12.0%
D) 13.3%

16) The return on the market portfolio is currently 13%. Battmobile Corporation stockholders
require a rate of return of 21%, and the stock has a beta of 3.5. According to CAPM, determine
the risk-free rate.
A) 7%
B) 14.7%
C) 9.8%
D) 24.2%

17) Use the following information to answer the following question(s).

Beta
Market 1
Firm A 1.25
Firm B 0.6

Market Return 10% Risk Free Rate 2%

The market risk premium is:


A) 2%.
B) 4%.
C) 6%.
D) 8%.
Firm A's risk premium is:
A) 2%.
B) 4%.
C) 6%.
D) 8%.
E) 10%.

Firm B's risk premium is:


A) 2.66%.
B) 4.8%.
C) 6.3%.
D) 8.1%.

The required rate of return for Firm A is:


A) 4%.
B) 8%.
C) 12%.
D) 16%.
E) Cannot be determined with information given.

18) The risk-free rate is currently 6.5%. Acid Battery Company stockholders require a rate of
return of 27.5%, and the stock has a beta of 2.1. What is the current market risk premium?
A) 6.90%
B) 21.00%
C) 13.65%
D) 10.00%

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