Measurement of Risk and Return in Investing
faahaad2004
SEU_FIN500_Assignment_Mod06.docxModule 6 Critical Thinking Assignment:
Measurement of Risk and Return in Investing
*Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit, no hard keys.
Problem 6-1: Standard Deviation
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Given the following probabilities and returns, for MKS, Inc., find the standard deviation. |
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DATA |
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Probability |
Return |
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0.40 |
7% |
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0.25 |
4% |
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0.15 |
18% |
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0.20 |
10% |
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Problem 6- 2 Holding-Period Period Return From the price data below, compute the holding-period returns for periods 2 through 4.
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DATA |
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TIME |
STOCK PRICE (SAR) |
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1 |
10 |
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2 |
13 |
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3 |
11 |
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4 |
15 |
Problem 6-3: Holding-Period Gain SAR and Return
Suppose you purchased 16 shares of DCI stock for 24.22 SAR per share on May 1, 2016. On September 1 of the same year, you sold 12 shares of the stock for 25.68 SAR per share. Calculate the holding-period dollar gain for the shares you sold, assuming no dividend was distributed, and calculate the holding-period rate of return.
Problem 6-4: Capital Asset Pricing Model
Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 5 percent and the expected return for the market is 12 percent.
Stock Beta
A .75
B .90
C 1.40
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Problem 6-5: Security Market Line |
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A. Determine the expected return and beta for the following portfolio: |
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DATA |
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Stock |
% of Portfolio |
Beta |
Expected Return |
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1 |
40% |
1.00 |
12% |
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2 |
25% |
0.75 |
11% |
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3 |
35% |
1.30 |
15% |
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Problem 6-6: Required Rate of Return using CAPM
a. Compute an appropriate rate of return for ABC common stock, which has a beta of 1.2. The risk-free rate is 2 percent, and the market portfolio has an expected return of 11 percent.
b. Why is the rate you computed an appropriate rate?
Problem 6-7: Expected Return, Standard Deviation
Below are the historical prices for Citigroup and the S&P500 Index. Calculate the average monthly returns and the standard deviation for each.
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DATA |
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Month |
Adidas |
S&P 500 |
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Stock Prices |
Index |
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May-14 |
47.57 |
1924 |
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June-14 |
47.10 |
1960 |
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July-14 |
48.91 |
1931 |
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August-14 |
51.65 |
2003 |
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September-14 |
51.82 |
1972 |
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October-14 |
53.53 |
2018 |
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November-14 |
53.97 |
2068 |
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December-14 |
54.11 |
2059 |
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January-15 |
46.95 |
1995 |
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February-15 |
52.42 |
2105 |
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March-15 |
51.52 |
2068 |
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April-15 |
53.32 |
2086 |
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May-15 |
54.97 |
2128 |
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