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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Calculate the expected return and standard deviation for a portfolio consisting of 30% in Ant Ltd and the remainder in Bell Ltd.
|
State of Economy |
Probability |
Stock A |
Rate of return Stock B |
|
Recession |
15% |
2% |
-30% |
|
Normal |
55% |
10% |
18% |
|
Boom |
??% |
15% |
31% |
Step by step
Solved in 2 steps
- Use the following information to calculate the expected return and standard deviation of a portfolio that is 40 percent invested in Kuipers and 60 percent invested in SuCo:Kuipers SuCoExpected return, E(R) 30% 26%Standard deviation, F 65 45Correlation 30Consider a position consisting of a K200,000 investment in Asset A and a K300,000 investment in Asset B. Assume that the daily volatilities of the assets are 1.5% and 1.8% respectively, and that the coefficient of correlation between their returns is 0.4. What is the five day 95% Value at Risk (VaR) for the portfolio (95% confidence level represents 1.65 standard deviations on the left side of a normal distribution)?Historical nominal returns for a company have been 16% and -40%. The nominal returns for the market index S&P500 over the same periods were -30% and 28%. Calculate the beta for the company. Assume that using the Security Market Line the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on the market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB). Assume that the short-term risk-free rate is 6%, the market index S&P500 is expected to pay returns of 30% with the standard deviation equal to 40%. Asset A pays on average 10%, has a standard deviation equal to 40% and is NOT correlated with the S&P500. Asset B pays on average 16%, also has a standard deviation equal to 40% and has a correlation of 1 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why.
- In a perfect world where asset return is normally distributed. We have risk and return characteristics of following assets below: Assets ABC DEF Market portfolio Expected Return 10% 15% 5% Standard Deviation 20% 40% 10% Correlation coefficient with market 0.6 0.2 1 Weight 60% 40% 0% If market return increase by 5% this month, what is the change in expected portfolio return of the same month in PERCENTAGE?Consider a position consisting of 200,000 investment in asset A and 300,000 investment in asset B. Assume that the daily volatility of the assets are 1.5% and 1.8% respectively, and that coefficient of correlation between their returns is 0.4. What is the five day 95% VAR for the portfolio (given 95% confidence level represents 1.65 standard deviations on the left side of the normal distribution)?In a perfect world where asset return is normally distributed. We have risk and return characteristics of following assets below: Assets ABC DEF Market portfolio Expected Return 10% 15% 5% Standard Deviation 20% 40% 10% Correlation coefficient with market 0.6 0.2 1 Weight 60% 40% 0% If market return increase by 5% this month, what is the change in expected portfolio return of the same month in PERCENTAGE? Any intermediate steps should be rounded to 4 or more decimal places. Round your final answer in percentage to 2 decimal places and exclude the % sign. For example, 20.1234% should be input as 20.12.
- N1 Consider a portfolio consisting of stocks and treasury bills. The expected return on the stocks is 25%, and the standard deviation is 30%. The expected return on the treasury bills is 1%, and treasury bills are risk free. All of these figures are annual. The portfolio's market value is $200 million and is allocated 90% to stocks and 10% to treasury bills. Determine the 1% annual VaR and the 1% weekly VaR using the analytical method.There are two assets and two states of the economy. State of Probability Rate of Return Rate of Return Economy of State of Stock A of Stock B Recession 0.60 -10% 15% Boom 0.40 30 -5 Suppose you have $30,000 total. If you put $9,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation on your portfolio?Calculate the weighted average expected return of the portfolio. Stock Investment Expected ReturnA $20,000 15%B $4,000 10%C $26,000 12%
- 2-11 We have the following information on a portfolio consisting of Stocks A, B, and C: A B C Expectd annual return 25% 20% 15% Standard Deviation of Return 35% 30% 25% Price per share 100 85 75 # shares 100,000 150,000 200,000 correlation coefficient (A,B) 0.5 correlation coefficient (A,C) 0.2 correlation coefficient (B,C) .8 number of days per year 365…(CAPM and expected returns) a. Given the following holding-period returns, LOADING... Month Zemin Corp. Market 1 8 % 5 % 2 5 4 3 0 2 4 −4 −1 5 6 4 6 3 3 , compute the average returns and the standard deviations for the Zemin Corporation and for the market. b. If Zemin's beta is 1.12 and the risk-free rate is 7 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.) c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk? Question content area…A portfolio consists of $15 million of asset A (for which annual expected return is 10% and annual return volatility is 25%), $15 million of asset B (for which annual expected return is 15% and annual return volatility is 30%), and $20 million of asset C (for which annual expected return is 20% and annual return volatility is 35%). The return correlation between each pairing of assets A, B and C is 0.2. Assume the annual portfolio return is normally distributed. What is the annual return volatility of the portfolio? a. 21.3% b. 24.9% c. 27.8% d. 32.5% e. None of the above
