Reference no: EM133060462
Investment Management
(Risk And Return)
NB : Show workings to all questions that led to the answer
Question 1. Use the table below to answer the questions given
|
Year
|
Return on stock A %
|
Return on stock B %
|
|
1
|
7
|
30
|
|
2
|
8
|
10
|
|
3
|
-12
|
16
|
|
4
|
5
|
-10
|
|
5
|
12
|
-6
|
- Calculate the arithmetic average return on the two stocks over the 5-year period
- Calculate the geometric average return of each stock.
- Calculate the standard deviation of returns of stock A only
Question 2. An investor purchased 100 shares of common stock at $20 per share one year ago. The company declared and paid a dividend of $2 per share during the year. The investor sold the stock for $21 per share after the one year holding period.
- Calculate the dollar return from this investment.
- Calculate the HPR for this investment.
- Partition the HPR into its dividend and capital appreciation components.
Question 3. Consider the following ex-post HPRs:
|
Year
|
Investment A (%)
|
Investment B (%)
|
|
1
|
10
|
14
|
|
2
|
15
|
-10
|
|
3
|
8
|
30
|
- Calculate the arithmetic mean HPR for each investment
- Calculate the geometric mean HPR for each investment
- Explain why the arithmetic and geometric means are different
Question 4. Based on the scenario below, what is the expected return for a portfolio with the following return profile?
Probability 0.2 0.3 0.5
Rate of return -25% 10% 24%
Question 5. Consider the following subjective probability distribution for a potential investment:
|
State of the economy
|
probability
|
Estimated rate of return
|
|
Strong growth
|
.1
|
25%
|
|
Moderate growth
|
.4
|
15
|
|
Weak growth
|
.4
|
10
|
|
Recession
|
.1
|
-12
|
- Calculate the expected rate of return
- Calculate the variance
- Calculate the standard deviation
- Calculate the coefficient of variation
- Interpret your answers in a-d
Question 6. Consider the following risk and return measures for four firms:
Average Return Standard Deviation
Chase Bank 10% 14%
Eco Bank 8 12
Wells Fargo 12 30
Citigroup 7 14
Rank- Order the firm (best to worst) by their risk and return attractiveness using the coefficient of variation.
Question 7. Assume the rate of return given below are for two stocks listed on the US Stock Market
|
Year
|
Return on stock A
|
Return on stock B
|
|
1
|
0.2
|
0.3
|
|
2
|
0.10
|
0.1
|
|
3
|
0.14
|
0.18
|
|
4
|
0.05
|
0.00
|
|
5
|
0.01
|
-0.08
|
- Calculate the arithmetic average return on the two stocks over the 5-year period.
- Which of the two stocks has a greater dispersion around the mean?
- Calculate the geometric average returns of each stock.
Question 8. Calculate the expected return based on the information below
|
State of economy
|
Probability of state of economy
|
Rate of return if state occurs
|
|
Recession
|
.3
|
.02
|
|
Boom
|
.7
|
.23
|
Question 9. Calculate the expected return based on the information in the table below
|
State of economy
|
Probability of state of economy
|
Rate of return if state occurs
|
|
Recession
|
.30
|
-.07
|
|
Normal
|
.60
|
.13
|
|
Boom
|
.10
|
.23
|
Question 10. A stock was purchased for $40 per share and sold for $50 per share one year later. In the course of the year the company paid a dividend of $2 per share.
- Calculate the return on the investment
- Calculate the dividend yield on the investment
- Calculate the capital gains yield on the investment