financial risk and return

Business & Finance
Price: $5 USD

Question description

Please see the following link to assist you to study "risk and return":

  1. You are given the following probability distribution of returns for stock J:

A probability of .2 that the return will be 12%; a probability of .35 that the return will be 18%; a probability of .3 that the return will be -10%; and a probability of .15 that the return will be 10%.  What is the expected return of this stock? What is the standard deviation rounded to the nearest whole number?

  1. Given the following hypothetical returns of large companies and T-bill between 2007 and 2012. Please calculate the average return and standard deviation of both large companies

   Year Large co. stock return T-bill return 

  2007  –14.69%    7.29% 

  2008  –26.47  7.99

  2009  37.23  5.87 

  2010  23.93  5.07 

  2011  –7.16  5.45 

  2012    6.57    7.64 

  1. Troy has a 2-stock portfolio with a total value of $100,000.  $37,500is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.  What is his portfolio’s beta?

  4.  You are given the following returns for the Market and for XYZ in years 1998 (the best year for the market) and 2001 (the worst year). (a) What is your estimate of the beta of stock XYZ? And (b) Assuming a risk free rate of 6 percent and an expected return on the Market of 12% in the coming year, what would be the required return on stock XYZ? 

   Market    XYZ

1998  45.00%    67.50%

2001  -15.00%    -22.50%

5.  Your research has determined the following information about the common stock of two particular firms.

   Stock A Stock B

    Expected Return:     10%    15%

    Standard Deviation     5%   9%

    Part 1:

1.  Explain what is meant by the stock’s “Expected Return”

2.  Calculate each stock’s coefficient of variation.

  1. Under what situation is the coefficient of variation useful? Briefly explain.

4.  Which stock is riskier?

5.  What do you base your answer on?

6.  What type of risk are we considering here?

7.  Is there anything that can be done to reduce this type of risk?  If so, what?

8.  When is this type of risk most relevant?

Part 2:

You did some additional research, and also found the following values for each stock’s beta coefficient:

   Stock A Stock B

Beta Coefficient    0.7    1.4

Other current information is as follows:

--Current Risk-free Rate:  5%

--Current Market Rate:  12%

1.  What type of risk are we now considering?

2.    What is the current Market Risk Premium?

3.  What is the required return for each stock suggested by CAPM?

4.  Will diversification reduce the type of risk identified in #1 above?

5.  Is there anything that can help to reduce this type of risk in a portfolio of stocks?  If so, what.

6.   Suppose that you invest $1,000 in Stock A, $1,500 in Stock B, and $2,500 in Stock C that has a beta of 2.0. Find your portfolio’s beta and required rate of return. 


Tutor Answer

(Top Tutor) Studypool Tutor
School: University of Virginia
Studypool has helped 1,244,100 students
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1827 tutors are online

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors