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finance exel

Chapter 8 Risk and Return rt = (Ct + Pt - Pt-1) / Pt-1 Calculating Return % = Beg Value (Pt-1) End Value (Pt) Dividend (Ct) % Return (rt) Company IBM $80.00 $87.00 $1.00 IBM $105.00 $94.00 $2.50 ADFEE $10.00 $15.50 $1.25 SDFBE $25.00 $18.75 $0.50 CAPM Risk Free Rate BETA Market Return Risk Free Rate RRR RRR= RFR + (Beta x (Market Return - RFR)) Stock A Stock B 4.0% 3.5% 1.09 2.00 8% 13% 4.0% 3.5% Portfolio Return Stock A Stock B Stock C Stock D Total Portfolio $ Invested Investment % $5,200 $4,100 $3,800 $7,200 $20,300 Portfolio Return Return % 25.0% 10.0% 3.0% 11.0% Portfolio Return Stock A Stock B Stock C Stock D Total Portfolio $ Invested Investment % $2,500 $4,500 $3,500 $5,500 $16,000 Portfolio Return Return % 18.0% 8.0% 5.0% 14.1% BETA Stock Price $25.00 $32.00 $15.00 $37.00 2.25 1.5 0.75 1 Portfolio Beta Stock A Stock B $ Invested $6,500 $4,500 Stock Market Re New Stock Price 10% 25% 15% 35% Investment % Beta 2.0 3.0 Stock C 2.5% 1.25 14% 2.5% Stock C Stock D Total Portfolio $3,500 $5,500 $20,000 0.8 1.0 Portfolio Return Standard Deviation and Coefficient of Variation Risk + Historical Returns Questions? A. on the basis of review which stock appears more risky? Why? B. Calculate the Standard Deviation and coefficient of variation for each stock and example Risk + Historical Returns examples Example Problems EX. One Year 1 2 3 4 5 Average Stock A Stock B Rate of Return 19% 8% 1% 10% 10% 12% 26% 14% 4% 16% C. On the basis of your calculation in Part B Which stock is more risky. Compare to answer in A D. Does the coefficient of variation provide better risk comparison than the standard deviation in each case. Why or Why not? Risk + Historical Returns examples Stock A 1 Return 2 Avg Return 4 3 squared 19 1 10 26 4 Stock B 1 Return 8 10 12 14 16 SUM Square root of (sum-1) CV EX. Two Year 1 2 3 4 5 Average 3 1-2 Stock A Stock B Rate of Return 13% 7% 8% 11% 11% 5% 7% 9% 13% 11% 1 Return 2 Avg Return 3 1-2 Square root of (sum-1) CV 4 3 squared 13 8 11 7 13 1 Return 7 11 5 9 11 SUM Square root of (sum-1) CV EX. Three Stock A Stock B Year Rate of Return 1 5% 3% 2 8% 15% 3 18% 12% 4 11% 11% 5 17% 7% Average 1 Return 2 Avg Return 3 1-2 5 8 18 11 17 Square root of (sum-1) CV 4 3 squared 1 Return 3 15 12 11 7 SUM Square root of (sum-1) CV Square root of (sum-1) CV Risk + Historical Returns answers for example one: A) Stock B 2 Avg Return 3 1-2 4 3 squared B) NO RESPONCE NEEDED C) D) SUM Square root of (sum-1) 2 Avg Return 3 1-2 4 3 squared Risk + Historical Returns answers for example Two: A) B) NO RESPONCE NEEDED C) D) SUM Square root of (sum-1) 2 Avg Return 3 1-2 4 3 squared Risk + Historical Returns answers for example three: A) B) NO RESPONCE NEEDED C) SUM Square root of (sum-1) D) : o: ee: Spreadsheet Exercise Jane is considering investing in three different stocks or creating three distinct twostock portfolios. Jane considers herself to be a rather conservative investor. She is able to obtain forecasted returns for the three securities for the years 2015 through 2021. The data are given in the following table. Year Stock A 2015 2016 2017 2018 2019 2020 2021 10.0% 13.0% 15.0% 14.0% 16.0% 14.0% 12.0% Stock B 10.0% 11.0% 8.0% 12.0% 10.0% 15.0% 15.0% Stock C 12.0% 14.0% 10.0% 11.0% 9.0% 9.0% 10.0% In any of the possible two-stock portfolios, the weight of each stock in the portfolio will be 50%. The three possible portfolio combinations are AB, AC, and BC. a. Calculate the expected return for each individual stock. b. Calculate the standard deviation for each individual stock. c. Calculate the expected returns for portfolios AB, AC, and BC. d. Calculate the standard deviations for portfolios AB, AC, and BC e. Would you recommend that Jane invest in the single stock A or the portfolio consisting of stocks A and B? Explain your answer from a risk-return viewpoint. f. Would you recommend that Jane invest in the single stock B or the portfolio consisting of stocks B and C? Explain your answer from a risk-return viewpoint