ID: 1418366

(Bold letters below are my answers)

FIN 3331 – Risk & Return Assignment

1. 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?

Expected return of this stock = 0.2*0.12 + 0.35*0.18 + 0.3*(-0.1) + 0.15*0.1 = 0.072 7.2%

Standard deviation = 11.64%

2. Given the following hypothetical returns of large companies and T-bill between 2007 and 2012. 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 Average 3.24 6.55 Std 24.11% 1.24%

3. 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? b = 0.375*0.75 + 0.625*1.42= 1.17 4. 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% Average 7.5% 11.25% Std 25.25% 37.87%

The correlation coefficient between market and stock calculated is 0.74

Beta = 0.74 * = 1.11

Required return on stock XYZ = 0.06 + 0.06*1.11 = 0.1266 12.66%

5.