Risk & Return

Variance Where. VAR (k) = Variance of returns Pi = Probability of ith possible outcome ki = Rate of return of ith possible outcome k = Expected rate of Return n = Number of possible values of returns .

Computation of Standard Deviation Possible Outcomes ki (%) ki .ќ (ki .ќ)2 1 50 40 1600 0.ќ)2 = 480 .1 160 ∑ Pi( ki .4 0 4 -10 -20 400 0.2 80 5 -30 -40 1600 0.2 80 3 10 0 0 0.1 160 2 30 20 400 0.ќ)2 Pi Pi(ki .

Risk & Return of Shares .

10% .21 0.9 0.2 14 -1.5 1 Good 10 6 16 30% 4.1 Good 0.81 0.243 Average 0.5 0.8 Avg 7.7 15.1 0.5 15 50% 7.01 0.49 0.5 7.5 Poor 5 9 14 20% 2.005 Poor 0.3 16 0.242 Exp Rate (%) Probability Expected Return State of Economy Probability (p) Return (R in %) Deviations (Deviation)2 p x (Deviation)2 Variance Standard Deviation (%) 0.1 1.Risk & Return of Portfolio Economy Share 1 2 Proportion 0.5 15 -0.8 15.

00 15.70 Probability (p) 30% 50% 20% Deviation (X Ltd) 4.00 15.00 15.50 Y Ltd 12.00 14.5 -0.Coefficient of Correlation Economic Scenario Conditions Good Average Poor Returns % Expected Return X Ltd 20.35 -1 .5 Deviation (Y Ltd) -2.08 -3.7 0.3 p x Product of Deviations -3.00 10.65 -0.5 -5.00 18.63 Covariance Covariance Coefficient of correlation -7.3 3.

13184813 α= .88140 2.13640 2.7580)-(28.29000 5.376666667) -2.00000 -0.023333333 2.08000 2.74000 -3.25210 2.56000 -0.52))/( (12*200.12960 12.13184813*2.37000 6.36000 7.23000 -0.01400 62.55000 X*Y X2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Returns on Security(%)=Y 6.89000 1.89960 0.36000 -3.06000 -2.04410 0.81640 21.05290 0.51000 0.85000 4.023333-(1.93000 3.2800000 28.Beta Computation ( β ) Return on Market(%)=X 7.00480 -1.2800*28.376666667 β= ((12*151.73000 -0.92250 20.36540 1.81340 -4.99290 0.28010 0.1735)-(.17350 200.75800 Month No of Observations Average β α 12 0.70940 47.34440 46.13440 43.76000 0.58000 4.62000 6.21000 -0.70250 Total 0.52000 -1.66669272 .52)2 ) 1.86000 -8.31860 -1.08000 47.47050 14.18000 -7.58000 1.08410 31.52000 151.30080 0.

37 -0.77351 2.023333 1 12.06259 Mar -8.93 6.28956 2.38401 Apr -7.66756 Dec 3.64074 0.07353 0.73667 1/12 0.74 -1.38333 -0.76 7.55360 0.89 5.86 -2.20333 1/12 2.53307 Feb -2.58667 1/12 0.18 -8.02333 -0.03485 Jul -1.17333 1/12 0.29 -2.06 6.58 -5.86667 1/12 0.57465 1.95682 Oct -0.39361 Average 0.13184813 .58333 -3.376667 Total β 1.62 2.49667 1.73 -0.51333 1/12 2.76333 -0.73667 5.23 -2.14667 1/12 1.85 4.39333 4.Beta Computation (β) Month kj ki-kj km km-km P P(ki-kj)(km-km) P(km-km)2 Jan 6.08129 2.85511 Jun 0.56 -0.08 3.36 -2.20333 0.55 2.88333 1.38010 0.90667 6.58 3.47333 1/12 2.20824 0.36 -7.21 -2.05667 4.02676 0.24333 1/12 -0.95667 1/12 0.03667 7.51 -0.46749 0.00 -3.68949 0.52 0.55757 Aug -3.59259 May 7.54233611 11.66667 1/12 1.64667 1/12 -0.41938 Nov 6.06526 0.62411 Sep -0.

Kj = expected or required rate of return on security j Rf =risk free rate of return Bj = beta coefficient of security j km = return on market portfolio .Capital Asset Pricing Model The CAPM is represented mathematically by Kj = Rf + Bj(km-Rf) Where.

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