Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 6, Problem 8MC
Summary Introduction
To determine: The average returns and standard deviation.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $7,500 of Share A, $4,800 of Share B, $5,700 of Share C, and $2,500 of Share D.
Required:
Compute the weights of the assets in your portfolio? And also, If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period?
Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM).
You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:
Tesla
Eagle
Expected return
13%
20%
Standard Deviation of return
20%
45%
Correlation of coefficient…
Suppose that your estimates of the possible one-year returns from investing in the common stock of the AYZ Corporation were as follows:
Probability of occurrence
0.15
0.25
0.3
0.15
0.15
Possible return
-10%
5%
20%
35%
50%
What are the expected return?
Calculate the standard deviation?
a. Given the following holding-period returns,
LOADING...
,
compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is
1.87
and the risk-free rate is
6
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?
Month
Zemin Corp.
Market
1
5
%
6
%
2
2
1
3
2
0
4
−4
−1
5
4
3
6
3
4
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).arrow_forwardYour client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)arrow_forwardSuppose that you initially invested 10,000 in the Stivers mutual fund and 5,000 in the Trippi mutual fund. The value of each investment at the end of each subsequent year is provided in the table: Which of the two mutual funds performed better over this time period?arrow_forward
- You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $7,500 of Share A, $4,800 of Share B, $5,700 of Share C, and $2,500 of Share D. Required: Compute the weights of the assets in your portfolio? If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period? Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM). ? You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio: Tesla Eagle Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4…arrow_forwardA portfolio consists of assets with the following expected returns (refer to image): a. What is the expected return on the portfolio if the investor spends an equal amount on each asset? b. What is the expected return on the portfolio if the investor puts 50 percent of available funds in technology stocks, 10 percent in pharmaceutical stocks, 24 percent in utility stocks, and 16 percent in the savings account?arrow_forwardYou are an active investor in the securities market and you have established an investment portfolio of two stock A and B five years ago. Required: Assume that you bought 200 stock B in your portfolio for total investment of $1200, now the market price of the stock is $75, the dividend paid for this stock is $2 each year. How much is the capital gain of this stock ? Assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given stock A accounts for 45% and stock B accounts for 55% of your portfolio? A B Expected return 12.5% 18.5% Standard Deviation of return 15% 20% Correlation of coefficient (p) 0.4arrow_forward
- a. Given the following holding-period returns, (Below)compute the average returns and the standard deviations for the Sugita Corporation and for the market. b. If Sugita's beta is 1.18and the risk-free rate is 4 percent, what would be an expected return for an investor owning Sugita? (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 Sugita's historical average return compare with the return you should expect based on the Capital Asset Pricing Model and the firm's systematic risk?arrow_forwardLeon has in his investment a portfolio that paid him the rate of returns of 14 %, -13%, 15.6%, 17% and 19.5% over the past five years. Required: a)Calculate the arithmetic average return (AAR) and geometric average return (GAR) of the portfolio? If someone asks you what is the actual compounding rate of return of Leon’s portfolio over the past five year, which one (AAR or GAR) will be a better answer? b)Following is forecast for economic situation and Leon’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio. State of economy Probability Rate of returns Mild Recession 0.25 -2.5% Normal 0.45 13.5% Growth 0.30 20% c) Assume that expected return of the stock A in Leon’s portfolio is 13.2%. Beta of this stock is 1.2, risk free rate is 3.5%. Calculate market portfolio rate of return, which is used to compute the expected return of this stock by Capital Asset Pricing Model (CAPM)?arrow_forwardConsidering the attached set of securities and portfolio returns: Assume that you initially invested $1,000,000 in the portfolio and that the distribution of the annual rate of return of the portfolio is normal. What is the distribution of the return of the portfolio 20 years after its formation? Provide the graph of the distribution of the return of the portfolio.arrow_forward
- Suppose you own an investment that had a total nominal return of 10.7% last year. If the inflation rate last year was 3.7%, what was your real return (in percent)? (Hint - think of economist Irving Fisher, how would Fisher have answered this question by doing an exact calculation?). . .arrow_forwardYou are considering investing in a mutual fund. The fund is expected to earn a return of 12 percent in the next year. If its annual return is normally distributed with a standard deviation of 4.50 percent, what return can you expect the fund to beat 95 percent of the time? what is the expected return(%)?arrow_forwardYou are considering investing in a mutual fund. The fund is expected to earn a return of 19.0 percent in the next year. If its annual return is normally distributed with a standard deviation of 10.3 percent, what return can you expect the fund to beat 95 percent of the time?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Portfolio Management; Author: DevTechFinance;https://www.youtube.com/watch?v=Qmw15cG2Mv4;License: Standard YouTube License, CC-BY