# Study Problems: Return and Break-even

902 Words4 Pages
Study Problems: Return and Break-even Problem 1 (Expect rate of return and risk): Summerville Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return of each? (Colorado State University-Global Campus, 2014). COMMON STOCK A COMMON STOCK B PROBABILITY RETURN PROBABILITY RETURN 0.30 11% 0.20 -5% 0.40 15% 0.30 6% 0.30 19% 0.30 14% 0.20 22% Expected return and risk (standard deviation) for each stock (Keown, Martin, & Petty, 2014, pp. 186, 191): Common stock A is the better investment: the expected return of 15 percent and risk (standard deviation) of 10.16 percent for common stock A is better (higher return, lower risk) than for common stock B (9.4 percent and 9.96 percent, respectively); the expected return/risk ratio is higher for common stock A (147.6 percent) than for common stock B (94.4 percent) (Keown, Martin, & Petty, 2014, pp. 186, 191). Problem 2 (Capital asset pricing model): The expected return for the general market is 12.8 percent, and the risk premium in the market is 9.3 percent. Tasco, LBM, and Exxos have betas of 0.864, 0.693, and 0.575, respectively. What are the corresponding required rates of return for the three securities? (Colorado State University-Global Campus, 2014). Required rates of return for the three securities: (Keown, Martin, & Petty, 2014, p. 208). Problem 3 (Break-even analysis): You