Risk and Return Assignment Question
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Risk and Return Assignment Question
FIN 3331 – Risk & Return Assignment
- 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?
- Given the following hypothetical returns of large companies and T-bill between 2007 and
- 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
- Troy has a 2-stock portfolio with a total value of $100,000. $37,500 is 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?
- 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%
- 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:
- Explain what is meant by the stock’s “Expected Return”
- Calculate each stock’s coefficient of variation.
- Under what situation is the coefficient of variation useful? Briefly explain.
- Which stock is riskier?
- What do you base your answer on?
- What type of risk are we considering here?
- Is there anything that can be done to reduce this type of risk? If so, what?
- 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%
- What type of risk are we now considering?
- What is the current Market Risk Premium?
- What is the required return for each stock suggested by CAPM?
- Will diversification reduce the type of risk identified in #1 above?
- Is there anything that can help to reduce this type of risk in a portfolio of stocks?
If so, what.
Risk and Return Assignment Question
- 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.
RUBRIC
Excellent Quality
95-100%
Introduction 45-41 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Literature Support
91-84 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Methodology
58-53 points
Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score
50-85%
40-38 points
More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.
83-76 points
Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.
52-49 points
Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality
0-45%
37-1 points
The background and/or significance are missing. No search history information is provided.
75-1 points
Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.
48-1 points
There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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