Chapter 8, Problem 22SP

a)

Summary Introduction

To determine: The annual rate of return and average return over 5 years’ period.

Introduction:

The risk and return are two closely related terms. The risk is the uncertainty attached to an event. In case of any investment, there is some amount of risk attached to it as there can be either gain or loss. While return in the financial term is that percentage which represents the profit in an investment.

Higher risk is associated with higher return and lower risk has a probability of lower return. The investor has to face a tradeoff between risk and return in terms of an investment.

The annual rate of return refers to that return which is charged or is earned on an investment for a year. This rate is expressed in percentage.

b)

Summary Introduction

To prepare: The standard deviation for the given data.

Introduction:

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. The Greek letter sigma represents the standard deviation.

c)

Summary Introduction

To determine: The coefficient of variation.

Introduction:

The coefficient of variation is a tool to determine the investment’s volatility.

d)

Summary Introduction

To determine: Sharpe ratio

Introduction:

Sharpe ratio helps to determine the performance of the investment.

e)

Summary Introduction

To prepare: A scatter diagram showing the company’s returns and the index returns.

f)

Summary Introduction

To determine: The beta of the B Industries and R Inc. by running regressions of their returns.

g)

Summary Introduction

To determine: The required returns of the two companies by security market line equation.

h)

Summary Introduction

To determine: The beta and the required return for a newly constructed portfolio.

i)

Summary Introduction

To determine: The new portfolio’s required return.