Reference no: EM133116673
Risk and Return Assignment
1.An investor purchases a stock for $50 and over the next year, receives a $0.75 dividend. At the end of the year, the stock is priced at $53. In the second year, the stock pays a $1.00 dividend and at the end of the year the stock is priced at $51.
a. Compute the dollar return for each year.
b. Compute the percentage return for each year.
Use the returns for the 3 assets below to answer the following questions.
Period Asset 1 Asset 2 Asset 3
1. 0.5% -2.9% -4.2%
2. 9.5% 22.4% 2.8%
3. 5.5% 22.1% 4.3%
4. -7.9% -2.3% -3.6%
5. -2.3% -5.9% -8.8%
6. 5.2% 12.8% 9.0%
7. 3.6% 4.9% 14.7%
8. -4.8% -4.9% 13.0%
9. -0.9% 8.5% -1.3%
10. 14.4% 12.0% 26.9%
11. -1.9% -17.9% 3.5%
2. Calculate the average return per period, the geometric (compounded) mean return, and the standard deviation of returns for each of the three assets.
3. Using your calculations in #2, compute the coefficient of variation for each of the three assets. Based on the coefficient of variation and the information in #2, which asset would you choose to invest in? Why?
4. Compute the average returns and standard deviation of the following portfolios over the 11 periods:
a. Portfolio 1: Invested equally in Asset 1 and Asset 2
b. Portfolio 2: Invested equally in Asset 1 and Asset 3
c. Portfolio 3: Invested equally in Asset 1, Asset 2, and Asset 3
d. In which one of the portfolios would you prefer to invest? Why?
5. An investor wants to invest to earn a return of 12%. She evaluates a stock with a beta of 1.3. The current risk-free rate is 4% and the expected return on the market is 10%. Should she invest in the stock? Why or why not?
6. The market risk premium for a stock is 7% and a stock has a beta of 0.8. What is the rate of return of the stock if the risk-free rate is 2%?
7. An investor requires an 11% rate of return. A stock has a beta of 1.5 and the risk-free rate is 3%. What is the necessary market risk premium to achieve the required rate of return? What would the expected market return be?