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    Practice-Risk and Return

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    elysepa7
    This document contains 8 practice exercises related to portfolio risk and return, the capital asset pricing model (CAPM), and scenario analysis. The exercises involve calculating expected returns, betas, risk premiums, and other metrics for stocks, bonds, and portfolios based on given market conditions and risk/return profiles. They assess skills like applying CAPM to determine required rates of return for different investments based on their systematic risk levels.

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    Practice-Risk and Return

    Uploaded by

    elysepa7
    10 views3 pages
    This document contains 8 practice exercises related to portfolio risk and return, the capital asset pricing model (CAPM), and scenario analysis. The exercises involve calculating expected returns, betas, risk premiums, and other metrics for stocks, bonds, and portfolios based on given market conditions and risk/return profiles. They assess skills like applying CAPM to determine required rates of return for different investments based on their systematic risk levels.

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    Đề ôn tài chính doanh nghiệp

    Original Title

    Practice-Risk and return (2)

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    This document contains 8 practice exercises related to portfolio risk and return, the capital asset pricing model (CAPM), and scenario analysis. The exercises involve calculating expected returns, betas, risk premiums, and other metrics for stocks, bonds, and portfolios based on given market conditions and risk/return profiles. They assess skills like applying CAPM to determine required rates of return for different investments based on their systematic risk levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    10 views3 pages

    Practice-Risk and Return

    Uploaded by

    elysepa7
    This document contains 8 practice exercises related to portfolio risk and return, the capital asset pricing model (CAPM), and scenario analysis. The exercises involve calculating expected returns, betas, risk premiums, and other metrics for stocks, bonds, and portfolios based on given market conditions and risk/return profiles. They assess skills like applying CAPM to determine required rates of return for different investments based on their systematic risk levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    PRACTICE- RISK AND RETURN

    EX1: Portfolio Risk and Return. Suppose that the S&P 500, with a beta of 1.0, has an
    expected return of 10% and provide a risk-free return of 4%.
    a. How would you construct a portfolio T-bill so from these two assets with an expected
    return of 8%? Specifically, what will be the weights in the S&P 500 versus T-bills?
    b. How would you construct a portfolio from these two assets with a beta of .4?
    c. Find the risk premiums of the portfolios in parts (a) and (b), and show that they are
    proportional to their betas.
    EX 2:

    a. Find the beta of each stock. In what way is stock D defensive?


    b. If each scenario is equally likely, find the expected rate of return on the market portfolio
    and on each stock.
    c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on
    the two stocks?
    d. Which stock seems to be a better buy on the basis of your answers to parts (a), (b), and
    (c)?

    EX 3. We Do Bankruptcies is a law firm that specializes in providing advice to firms in


    financial distress. It prospers in recessions, when other firms are struggling. Consequently,
    its beta is
    negative 2.
    a. If the interest rate on Treasury bills is 5% and the expected return on the market
    portfolio is 15%, what is the expected return on the shares of the law firm according to the
    CAPM?
    b. Suppose you invested 90% of your wealth in the market portfolio and the remainder of
    your wealth in the shares in the law firm. What would be the beta of your portfolio?

    EX 4. The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%.
    According to the capital asset pricing model:
    a. What is the risk premium on the market?
    b. What is the required return on an investment with a beta of 1.5?
    c. If an investment with a beta of .8 offers an expected return of 9.8%, does it have a
    positive NPV?
    d. If the market expects a return of 11.2% from stock X, what is its beta?

    EX 5: A stock is selling today for $40 per share. At the end of the year, it pays adividend of
    $2 per share and sells for $44.
    a. What is the total rate of return on the stock?
    b. What are the dividend yield and percentage capital gain?
    c. Now suppose the year-end stock price after the dividend is paid is $36. What are
    the dividend yield and percentage capital gain in this case?
    EX 6: Here are rates of return on a broad stock market index and on Treasury bills
    between 2011 and 2015.
    a. What was the risk premium on common stock in each year?
    b. What was the average risk premium?

    EX 7: Scenario Analysis. Consider the following scenario analysis


    a. Is it reasonable to assume that Treasury bonds will provide higher returns in
    recessions than in booms?
    b. Calculate the expected rate of return and standard deviation for each investment.
    c. Which investment would you prefer?
    EX 8: The common stock of Leaning Tower of Pita Inc., a restaurant chain, will
    generate payoffs to investors next year, which depend on the state of the economy, as
    follows:

    The company goes out of business if a recession hits. Calculate the expected rate of return
    and standard deviation of return to Leaning Tower of Pita shareholders. Assume for
    simplicity that the three possible states of the economy are equally likely. The stock is
    selling today for $80.

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