Objectives:

1. Explain the relationship between risk and return.

2. Describe the two components of a total holding period return, and calculate this return for an asset.

3. Explain what an expected return is, and calculate the expected return for an asset.

4. Explain what the standard deviation of returns is, explain why it is especially useful in finance, and be able to calculate it.

5. Explain the concept of diversification.

1. Panday, Inc. purchased 100 shares of Metalz, Inc. common stock for Php 25 per share one year ago. During the year, Metalz, Inc. paid cash dividends of Php 2 per share. The stock is currently selling for Php 30 per share. If Panday sells all of his shares of Metalz, Inc. today, what rate of return would he realize?

2. Ruzty Corporation purchased ratchets rotator one year ago for Php 6,500. During the year it generated Php 4,000 in cash flow. If Ruzty sells it, he could receive Php 6,100 for it. What is ratchets rotator's rate of return?

3. Product A was purchased six months ago for Php 25,000 and has generated Php 1,500 cash flow during that period. What is the asset's rate of return if it can be sold for Php 26,750 today?