During the same year, the risk-free rate was 5% and the return on the m portfolio was 12%. (1) What is the actual return earned by your portfolio? (ii) What is the beta of your portfolio? (2 (iii) Using the beta calculated in (I1) above, calculate tte required return or your portfolio
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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.
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- Your stock's returns for the past four years are as follows. t Return t1 19.79% t2 -0.58% t3 8.55% t4 4.68% Compute the geometric average return for this stock. Please enter your answer as a PERCENT rounded to 2 decimal places.Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%. Your risky portfolio includes the following investments in the given proportions: Stock A Stock B Stock C 27% 33 40 Your client decides to invest in your risky portfolio a proportion (y) of his total investment budget with the remainder in a T-bill money market fund so that his overall portfolio will have an expected rate of return of 15%. Required: a. What is the proportion y? (Round your answer to 1 decimal place.) Proportion y % 4An analyst gathered the following information for a stock and market parameters: • stock beta = 1.22; • expected return on the Market = 8.17%; expected return on T-bills = 2.08%; • current stock Price = $6.2; . . . . expected stock price in one year = $14.64; expected dividend payment next year = $3.14. Calculate the required return for this stock. Please share your answer as a percentage rounded to 2 decimal places.
- An analyst gathered the following information for a stock and market parameters: . stock beta= 1.11; expected return on the Market - 9.55%; expected return on T-bills- 2.03%; . current stock Price = $5.62; . . . . expected stock price in one year $11.26; expected dividend payment next year = $2.29. - Calculate the required return for this stock. Please share your answer as a percentage rounded to 2 decimal places.Stock A's returns the past 5 years have been 10%,-15%, 35%, 10%, and -20%. Stock B's returns have been -5%, 1%, -4%, 40%, and 30%. What is the correlation coefficient for returns between Stock A and Stock B7 (-0.35) -6 The Relevant Risk of a Stock: The Capital Asset Pricing Model (CAPM) e assume that investors are risk averse and demand a premium for bearing risk; at is, the higher the risk of a security, the higher its expected return must be to duce investors to buy it or to hold it. All risk except that related to broad market ovements can, and presumably will, be diversified away. After all, why accept risk at can be eliminated easily? This implies that investors are primarily concerned th the risk of their portfolios rather than the risk of the individual securities in the rtfolio. How, then, should the risk of an individual stock be measured? The Capital Asset Pricing Model (CAPM) provides one answer to that question. stock might be quite risky if held by itself, but-because…You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns: Year rA rB 2014 -20.00% -5.00% 2016 42.00 15.00 2017 20.00 -13.00 2018 -8.00 50.00 2019 25.00 12.00 a. Calculate the average rate of return for each stock during the 5-year period. b. Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? c. Calculate the standard deviation of returns for each stock and for the portfolio. d. Suppose you are a risk-averse investor. Assuming Stocks A and B are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio? Why?
- An analyst gathered the following information for a stock and market parameters: stock beta= 1.08; • expected return on the Market = 11.97%; • expected return on T-bills = 1.55%; • current stock Price = $9.01; • expected stock price in one year = $11.14; • expected dividend payment next year = $3.23. Calculate the expected return for this stock. Please share your answer as a percentage rounded to 2 decimal places.Assume these are the stock market and Treasury bill returns for a 5-year period: T-Bill Return Year Stock Market Return (8) (8) 2016 32.50 0.07 2017 11.80 0.07 2018 -2.40 0.07 2019 13.70 0.25 2020 22.40 0.27 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Complete this question by entering your answers in the tabs below. Required A Required B Required C What was the risk premium on common stock in each year? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative values should be entered with a negative sign.. Year Risk Premium 2016 % 2017 % 2018 % 2019 % 2020 %Assume these are the stock market and Treasury bill returns for a 5-year period: ITT Stock Market T-Bill Return Year Return (%) (%) 2013 33.70 0.13 2014 13.30 0.13 2015 -3.60 0.13 2016 14.70 0.08 2017 24.20 0.10 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Complete this question by entering your answers in the tabs below. Required A Required B Required C What was the risk premium on common stock in each year? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Year Risk Premium 2013 % 2014 % 2015 % 2016 2017 %
- Stocks A and B have the following historical returns: year stock a stock b 2003 -18% -24% 2004 44% 24% 2005 -22% -4% 2006 22% 8% 2007 34% 58% A. Calculate the average rate of return for each stock during the 5-year period. Assumethat someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year?What would have been the average return on the portfolio for the 5-year period? B. Now calculate the standard deviation of returns for each stock and for the portfolio.3. Stocks A and B have the following historical returns: Year Stock A return Stock B return2004 (24.25%) 5.5%2005 18.5% 26.73%2006 38.67% 48.25%2007 14.33% (4.5%)2008 39.13% 43.86% a) Calculate the average rate of return for each stock during the period 2004 through 2008. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period? b) Calculate the standard deviation of returns for each stock and for the portfolio. c) Looking at the annual returns on the two stocks, would you guess that the correlation coefficient between the two stocks is closer to +0.8 or to –0.8? d) If more randomly selected stocks had been included in the portfolio, which of the following is the most accurate statement of what would have happened to p? I. p would have remained constant. II. p would have been in the…Stocks A and B have the following historical returns:Year Stock A’s Returns, rA Stock B’s Returns, rB2003 (18%) (24%)2004 44 242005 (22) (4)2006 22 82007 34 56a. Calculate the average rate of return for each stock during the 5-year period.Assume that someone held a portfolio consisting of 50% of Stock A and 50%of Stock B. What would have been the realized rate of return on the portfolioin each year? What would have been the average return on the portfolio duringthis period?b. Now calculate the standard deviation of returns for each stock and for theportfolio. Use Equation 6-5.c. Looking at the annual returns data on the two stocks, would you guess thatthe correlation coefficient between returns on the two stocks is closer to 0.8 orto 0.8?d. If you added more stocks at random to the portfolio, which of the followingis the most accurate statement of what would happen to p?(1) p would remain constant.(2) p would decline to somewhere in the vicinity of 20%.(3) p would decline to…