ASS2 FIN 3331 Risk And Return Assignmen

Nguyen Duc Thuan
ID: 1349672

FIN 3331 – Risk & Return Assignment

1. Answers:
The expected return of this stock is:
E[RJ] = 0.2(12%) + 0.35(18%) + 0.3(-10%) + 0.15(10%) = 7.2% The standard deviation is:
2J = 0.2(0.12 – 0.072)2 + 0.35(0.18 – 0.072)2 + 0.3(-0.1 – 0.072)2 + 0.15(0.1 – 0.072)2 = 0.0135
J = = 11.63%

2. Answers: The average return and standard deviation of Large co. stock return is:
Sum of Large co. stock = -14.69 – 26.47 + 37.23 + 23.93 – 7.16 + 6.57 = 19.41
Mean = Sum/N = 3.235
Large = =

The average return and standard deviation of T-bill return is:
Sum of T-bill = 7.29 + 7.99 + 5.87 + 5.07 + 5.45 + 7.64 = 39.31
Mean = Sum/N = 6.552
T-bill = =

3. Answers:
Stock A: $100,000 x 0.75 = $75,000
Stock B: $37.500 x 1.42 = $53,250
Sum = $75,000 + $53,250 = $128,250
His portfolio’s beta = = 0.934

4. Answers:
a) Estimated beta of stock XYZ: = = 1.5
b) Required return on stock XYZ:
RXYZ = RRF + (RM – RRF) x XYZ = 6% + (12% - 6%) x 1.5 = 15%

5. Answers:
.
Part 1:

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

2. Coefficient of variation of stock A = = 0.5 Coefficient of variation of stock B = = 0.6
3. Under what situation is the coefficient of variation useful? Briefly explain.

4. Stock B is riskier than stock A.

5. Because the coefficient of variation of stock A is 0.5, which is smaller than the coefficient of variation of stock B (0.6).

6. Stand-Alone Risk.

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

8. When the investors need only an asset.

Part 2:

1. Portfolio Risk.

2. RPM = RM – RRF = 12% - 5% = 7%

3. RA = RRF + (RM – RRF) x A = 5% + (12% - 5%) x 0.7 = 9.9%
RB = RRF + (RM – RRF) x B = 5% + (12% - 5%) x 1.4 = 14.8%

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.
Sum a portfolio = $1,000 +