1. Returns and Risk
Estimate and compare the returns and variability (i.e. annual standard deviation over the past five years) of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest? Reynolds appears to be the riskiest stock based on the returns and variability alone currently holding the highest average return out of two at 1.87%. With their higher return rate over the three they also hold the highest standard deviation of 9.1%, which in turn infers that they may hold the highest beta out of the three.

2. Portfolio Risk
Suppose Sharpe’s position had been 99 percent of equity funds invested in the S&P 500 and either one per cent in Reynolds over one percent in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? How does this relate to your answer in question 1 above?

Weight: .99 in S&P 500
Alternative: .01 in Reynolds or Hasbro

Reynolds stock fluctuates more than Hasbro’s so the return is higher to accommodate the increased variability that Reynolds offers. On the other hand, Hasbro is less variable than Reynolds therefore the return on the equity investment is lower since the risk is lower. In reviewing this information it confirms the answer I stated in question 1 regarding which stock appears to be the riskiest.

3. Regression Analysis to Calculate Beta
Perform a regression of each stocks’ monthly returns on the Index returns to compute a “beta” for each stock. How does this relate to your answer in question 2 above?

...Solution to Case 02
Risk and Return
Flirting With Risk
Questions:
1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?
I would explain to Mary that risk and return are positively related, i.e. if one expects to earn higher returns, then one has to be willing to invest in stocks whose price can vary significantly from year to year or in different economic conditions. For example, in the table below we see that treasury bills would have yielded 4% with almost no variability, while the index fund is expected to yield 10.1% with a standard deviation of 9.15%.
| | Expected Rate of Return |
|Scenari/o |Probability |Treasury Bill |Index Fund |Utility Company |High-Tech Company|Counter-Cyclical |
| | | | | | |Company |
|Recession |20% |4% |-2% |6% |-5% |20% |
|Near Recession |20% |4% |5% |7% |2%...

...1. You are offered a T-note that pays $1,000 in 9 months (or 270 days) for $910. You have $910 in a bank that pays a 5% nominal rate, with 365 daily compounding. You plan to leave the money in the bank if you don’t buy the risk-free T-note.
Which investment should you choose? Use the following all three solution methods to verify your answer.
Greatest future wealth: FV
Figure out FV of $910 left in a bank with 9 months, and then compare with T-note’s FV=$1,000
Inputs: N = 270, I/Y =5%/365=0.0137%, PV = -$910, PMT=0
Output: PV= $ 944.29
Cause $1.000 > $944.29, so, I will buy T-note.
Greatest wealth today: PV
Figure out PV of T-note, and then compare with its $910 cost
Inputs: N = 270, I/Y = 5%/365=0.0137%, PMT=0, FV=$ 1000
Output: PV= $-963.69
$963.69 > $910, so buy the note to raises my wealth.
Highest effective rate of return.
Figure out the EAR% on T-note, and then compare with 5%, which is your opportunity cost of capital:
Inputs: N = 270, PV=-$910, PMT=0, FV= $1000
Output: I/Y= 0.0349%
EAR = EAR%=〖 (1+0.000349)〗^365 – 1 = 0.1358 =13.58%
Cause 13.58% > 5%, so I will buy the T-note.
You want to purchase a house: your maximum monthly payment is $1,600, and you also have a saving of $35,000 as the down payment. You apply for a 30-year fixed mortgage loan with APR 4.49%. What is the maximum house price you can afford to buy?
Inputs: PMT=$1,600 FV=0 N=30*12=360 I/Y=4.49%/12=0.3742%
Output: PV=-$316,133.65
Maximum...

...Table of Contents
1. Introduction 2
2. Literature review 3
2.1. ROI Case Study: IBM- November 2012 (Nucleus Research) 3
3. Methodology 4
4. Analysis 5
4.1. Adani Power 5
4.2. Torrent Power 6
5. Conclusion 7
1. Introduction
An investment is an exposure of cash that has the objective of producing cash inflows in the future. The worthiness of an investment is measured by how much cash the investment is expected to generate.
The analysis of Return on Investment (ROI) is a financial forecasting tool that assists the business manager in evaluating whether a proposed investment opportunity is worthwhile within the context of the company’s business objectives and financial constraints.
The investments to be analysed have some of the following characteristics:
* A major amount of money is involved.
* The financial commitment is for more than one year.
* Cash flow benefits are expected to be achieved over many years.
* The strategic direction of the company may be affected.
* The company’s prosperity may be significantly affected if the investment is made or not made.
Every business should aim to earn a realistic rate of return on the total capital invested in that business.
The capital invested in a business is the total worth of the business, which includes the equity or owner’s capital plus the value of all the...

...\
Return on Investment
Name
Institutional Affiliation
QUESTION 1
Experts argue that its essentials to establish ROI parameters before embarking on new public health projects especially those involve acquisition of new information technologies. This means that before embarking on the projects, organizations should calculate the incremental gain from such actions basing their parameters on the long term gain. Before undertaking healthcare information systems and related projects, top decision makers should evaluate the investment potential by comparing the timing and magnitude of the benefits to the investment costs. On this reason, an effective determination of ROI of information systems on healthcare helps to provide an excellent decision in consideration of alternative designs for their performance, stakeholder expectations and costs. A recent study by The Standish Group International Inc., has found that the U.S had wasted over $55 billion, which was an increase in unnecessary overspending for IT related projects in healthcare. The determination of ROI on healthcare systems helps to avoid unnecessary overspending on IT infrastructure.
Research has proven that unlike basic equipment for healthcare that require routine improvements, in terms of ROI, clinical decision support applications are difficult to analyze. For this reason, establishing effective parameters such as quantifying the real...

...
ROI Project: Phase #1
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Like it or not, with the current state of the economy, as well as, enforced implications of the Affordable Care Act, a large number of hospitals and healthcare agencies will close their doors for good this year. Perhaps the most common cause of these closures will be the result of inadequate financial performance. Like any business entity, it is the lack of proper financing that ultimately kills any healthcare organization. There is a basic fundamental principle of finance that no healthcare organization can ignore; ultimately, the organization must generate a return from its investment that at least equals the cost of the financing supporting that investment. If the overall return on investment (ROI) is not equal to greater that the organization’s cost of funds, financial failure will occur (Cleverley, 1990). ROI has been an essential aspect of financial accounting ever since a group of financial experts at E.I. du Pont de Nemours and Co. (DuPont) invented the concept in the early part of the century (Southerst, 1993). DuPont’s concept of financial...

...Assignment #1 – Return on Financial Assets
Money and Banking – Fall 2011
October 30, 2011
Assignment 1: Return on Financial Assets
1. Consider the following four debt securities, which are identical in every characteristic except as noted:
W: A corporate bond rated AAA
X: A corporate bond rate BBB
Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y
List the bonds in the order of its interest rate (yields to maturity) from highest to lowest. Explain your work.
Bond ratings are grades given to bond to indicate their credit quality (Blaha, 10). According to the Standards and Poor format the letters are upper case and lower-case in order to differentiate themselves, and also shows a company likelihood of default the grades are as follows:
AAA and AA: High credit-quality investment grade
AA and BBB: Medium credit-quality investment grade
BB, B, CCC, CC, C: Low credit-quality (non-investment grade), or “Junk Bonds”
D: Bonds in default for non-payment of principal and/or interest
Debt securities differ in the types of periodic payments they make, promising to pay a specified amount of interest, which is a payment of series made by the borrower to the investor in additional to repayment of the principal (Croushore, 2010....

...expected market risk premium is crucial. You must carefully explain what you do and any assumption you make.
Risk Premium Estimation. Two approaches you could use to estimate the Equity Risk Premium:
* Assume that expected return on the market portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio. Subtract the RFR from the expected return estimated and arrive at your equity risk premium. Don’t forget to multiply this by the beta value.
* Implied equity premium. This assumes that the overall market is correctly priced.
The valuation model suggests value equals:
Value = Expected Dividends Next Period/ (Required Return on Equity - Expected Growth Rate)
This is the present value of dividends growing at a constant rate. We can obtain three of the four inputs in this model can be obtained externally:
* the current level of the market (value) of the index,
* the expected dividends next period, and
* the expected growth rate in earnings and dividends in the
long term.
The only “unknown” is then the required return on equity; when we solve for it, we arrive at an implied expected return on stocks. Subtracting out the risk-free rate will yield an implied equity risk premium (see Damodaran Website for more)...

...information is incorporated into a company’s share price. As such, consensus estimates of earnings growth should be reflected in the company’s price and no excess returns can be made from this information (Zacks (1979)).
In spite of this, growth is an important determinant of security returns as strategies focusing on investing in stocks with the dual characteristics of a low PE ratio and high EPS outperforms stocks with a low PE alone (Bird and Whitaker (2003)). Moreover, Murphy Jr. (1968) showed that there is a high degree of correlation between relative growth of per share earnings and relative percentage change in stock prices in the same time period again reinforcing the basic investment premise that fundamental variables such as earnings growth have a substantial impact on changes in stock prices.
Nevertheless, it is recognised that earnings are notoriously difficult to forecast and portfolios should not be selected on the sole basis of earnings growth (Harris (1999)). Moreover, earnings forecasts are subject to revisions and Mixon (2001) showed that revisions generally cause stock prices to drift in the direction of the revision and stocks with forecasts revised upward have good price momentum and a high market-to-book ratio. As such, any stock which had its earnings downgraded more than 20% during the investment period would be replaced with another stock that fit the original selection criteria of a PE...

7587 Words |
21 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":36342664,"categoryName":"Organizations","categoryParentId":"3","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":3,"pageRange":"1-3","totalPages":3}},"access":"premium","title":"Investment and Return","additionalIds":[17,9,27,7],"additional":["Literature","Entertainment","Sports \u0026 Recreation","Education"],"loadedPages":{"html":[],"text":[1,2,3]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Investment-And-Return-1189590.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"}}