Explanation Compute expected return. Given, The weights are 0.1, 0.2, 0.4, 0.2, and 0.1 for the different demands. The rate of return is (50%), (5%), 16%, 25% and 60% for the different demands. The formula to calculate the expected return is, r ∧ p = ∑ i = 1 N w i r ∧ i = w 1 r ∧ 1 + w 2 r ∧ 2 + ... + w N r ∧ N Where, r ∧ p is the expected rate of return. w i is the weight of the stock. r i is the estimated rate of return. N is the number of stocks. Substitute 0.1, 0.2, 0.4, 0.2 and 0.1 for the weights w 1 , w 2 , w 3 , w 4 , a n d w 5 respectively and (50%), (5%), 16%, 25% and 60% for the rate r 1 , r 2 , r 3 , r 4 a n d r 5 respectively. r ∧ p = [ ( ( 0.1 ) × ( − 50 % ) ) + ( ( 0.2 ) × ( − 5 % ) ) + ( ( 0.4 ) × ( 16 % ) ) + ( ( 0.2 ) × ( 25 % ) ) + ( ( 0.1 ) × ( 60 % ) ) ] = ( − 5 % ) + ( − 1 % ) + 6.4 % + 5 % + 6 % = 11.4 % The stock’s expected return is 11.4%. Compute standard deviation. Given, The weights are 0.1, 0.2, 0.4, 0.2, and 0.1 for the different demands, and The rate of return is (50%), (5%), 16%, 25% and 60% for the different demands. Calculated, The expected rate of return is 11.4%. Calculation of standard deviation: The formula to calculate the standard deviation is: σ = ∑ i = 1 N ( r i − r ∧ ) 2 P i Where, r ∧ is the expected rate of return, w i is the weight of the stock, r i is the estimated rate of return, N is the number of stocks, σ is the standard deviation Substitute 0

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN: 9781285065137

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

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Question

Chapter 8, Problem 1P

Summary Introduction

To determine: The stocks expected return, standard deviation, and coefficient of variation.

Portfolio: It refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by investors and financial users. A portfolio is constructed in accordance with the risk tolerance and the objectives of the company.

Expected Return on Stock: The expected return on stock refers to the weighted average of expected returns on those assets, which are held in the portfolio.

Standard Deviation: The standard deviation refers to the stand-alone risk associated with the securities. It measures how much a data is dispersed with its standard value. Sigma represents the standard deviation.

Coefficient variation: The coefficient of variation is a tool to determine the risk. It determines the risk per unit of return. It is used for measurement, when the expected returns are same for two data.

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Chapter 8 Solutions

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Ch. 8 - Suppose you owned a portfolio consisting of...Ch. 8 - Prob. 2Q Ch. 8 - Prob. 3Q Ch. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8Q Ch. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 1P

Ch. 8 - PORTFOLIO BETA An individual has 35,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - Prob. 5P Ch. 8 - EXPECTED RETURNS Stocks X and Y have the following...Ch. 8 - PORTFOLIO REQUIRED RETURN Suppose you are the...Ch. 8 - BETA COEFFICIENT Given the following information...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 1.5,...Ch. 8 - Prob. 10P Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14%...Ch. 8 - CAPM, PORTFOLIO RISK. AND RETURN Consider the...Ch. 8 - Prob. 14P Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - Prob. 20P Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SP Ch. 8 - Prob. 23IC Ch. 8 - Prob. 1DQ Ch. 8 - Prob. 2DQ Ch. 8 - Prob. 3DQ Ch. 8 - Select one of the four stocks listed in Question 3...Ch. 8 - Go back to the summary page to see an estimate of...Ch. 8 - Prob. 6DQ Ch. 8 - Prob. 7DQ Ch. 8 - Beta pf CPB company Beta of the MSI Company is...

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Solution Summary: The author explains how to determine the stocks expected return, standard deviation, and coefficient of variation.

Chapter 8 Solutions