Transcript Tentative Outline - Bilkent University

Risk-Return Problems
7. Calculating Returns and Deviations Based on the following
information, calculate the expected return and standard deviation
for the two stocks. Find covariance and correlation between the
two stocks.
State of Economy
Recession
Normal
Boom
Probability of State
0.15
0.60
0.25
Stock A Return
0.02
0.09
0.18
Stock B Return
-0.15
0.18
0.50
Answer: AB = 0.0103
AB= 0.9953
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Risk-Return Problems
10. Returns and Deviations Consider the following information:
State of Economy
Boom
Good
Poor
Bust
Probability of State
0.20
0.50
0.25
0.05
Stock A Return
0.10
0.07
0.04
0.00
Stock B Return Stock C Return
0.20
0.35
0.10
0.15
0.00
-0.05
-0.08
-0.40
a. Your portfolio is invested 30 percent in A and C, and 40 percent
in B. What is the portfolio expected return?
b. What is the variance of this portfolio? The standard deviation?
Answer:
E(kP)= 0.08765
2P = 0.008338
 P = 0.091
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Risk-Return Problems
30. Portfolio Returns and Deviations Given the following information on a
portfolio of three stocks:
State of Economy
Boom
Normal
Bust
Probability of State
0.20
0.70
0.10
Stock A Return
0.20
0.10
0.00
Stock B Return Stock C Return
0.30
1.00
0.05
0.30
-0.20
-0.80
a. If your portfolio is invested 30 percent in A and B and 40 percent
in C, what is the portfolio expected return? The variance? The
standard deviation?
b. If the expected T-bill rate is 5.25 percent, what is the expected risk
premium on the portfolio?
c. If the expected inflation rate is 5 percent, what is the expected real
return on the portfolio? What is the expected real risk premium on
the portfolio?
Answer: a) expected return=0.1875 standard deviation=0.2426
b)premium=0.135
c)portfolio expected real return=0.13095 real premium=0.12857
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Risk-Return Problems
32. Analyzing a Portfolio You have $100,000 to invest in either
Stock D, Stock F, or a risk-free asset. You must invest all of your
money. Your goal is to create a portfolio that has an expected
return of 10 percent and is only 60 percent as risky as the overall
market. If D has an expected return of 20 percent and a beta of
1.5, F has an expected return of 15 percent and a beta of 1.15 and
the risk-free rate is 5 percent, how much money will you invest in F?
Answer: $66,667 investment in F
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Risk-Return Problems
33. Systematic versus Unsystematic Risk Given the following
information on stocks A and B:
State of Economy
Recession
Normal
Boom
Probability of State
0.15
0.60
0.25
Stock A Return
0.14
0.24
0.28
Stock B Return
-0.18
0.10
0.40
The market risk premium is 8 percent and the risk-free rate is 6
percent. Which stock has the most systematic risk? Which one has
the most unsystematic risk? Which stock is “riskier”? Explain.
Answer:
A has more systematic risk
B has more unsystematic risk
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