UNIT 4

Questions:
1. What are the main operations of commercial banks with bills?
2. How to define an income of a joint-stock company per 1 share?
3. How to define the coefficient price-return (profit)?
4. How with a help of coefficient P/E to define the share price?
5. How to define a dividend return on a share?
6. How to define a market capitalization?
7. How to define the profitability of the share capital?

Tasks:
1. You are an owner of well diversified investment portfolio on the sum of $9000
with ß=1,2 and expected return 12%. You suppose to increase your portfolio with the
help of purchasing of 100 shares of company X at $10 price per share. Required
return on these shares is 20%, ß=2,0. What will be the required return and ß of
portfolio after purchasing of new shares?

2.You own a portfolio that is 40 percent invested in Stock X, 35 percent in stock Y,

and 25 percent in Stock Z. The expected returns on these three stocks are 8 percent,
15 percent, and 25 percent, respectively. What is the expected return on the portfolio?

3. You own a stock portfolio invested 20 percent in Stock Q, 40 percent in stock R,

25 percent in Stock S and 15 percent in Stock T. The betas for these four stocks are
1.10, 0.95, 1.40, and 0.70, respectively. What is the portfolio beta?

4. Shares of company are sold under the $36 per share at present time. One year ago
the price of share was $33. Recently company has paid dividends in the size of $3 per
share. What is the rate of investment profitability in the share of the company
for the last year?

5. Considering the following information calculate the expected return for investment
fund. Expected return in the market is 15%. Risk free rate is 7%.
Shares Investment ß
(thousands, UAH)
A 200 1,5
B 300 -0,5
C 500 1,25
D 1000 0,75
How expected return on portfolio will change, if the shares of Company C
will be replaced by the shares of company E with ß=2 & portfolio will be added by
the amount of 500 000 UAH with the help of purchasing the securities of investment
fund with risk equal to market.
 Home tasks:
1. You are considering acquiring shares of common stock in the Madison Beer
Corporation. Your rate of return expectations are as follows:
MADISON BEER CORP.
Possible Rate of Return Probability
–0.10 0.30
0.00 0.10
0.10 0.30
0.25 0.30
Compute the expected return [E(Ri)] on your investment in Madison Beer.

2. A stockbroker calls you and suggests that you invest in the Lauren Computer
Company. After analysing the firm’s annual report and other material, you believe
that the distribution of rates of return is as follows:
LAUREN COMPUTER CO.
Possible Rate of Return Probability
–0.60 0.05
–0.30 0.20
–0.10 0.10
0.20 0.30
0.40 0.20
0.80 0.15
Compute the expected return [E(Ri)] on Lauren Computer stock.

3. The following are annual rates of return for U.S. government T-bills and U.K.
common stocks.
Year U.S. Government T-Bills U.K. Common Stock

2015 .063 .150

2016 .081 .043
2017 .076 .374
2018 .090 .192
2019 .085 .106

a. Compute the arithmetic mean rate of return and standard deviation of rates of
return for the two series.
b. Discuss these two alternative investments in terms of their arithmetic average rates
of return, their absolute risk, and their relative risk.
c. Compute the geometric mean rate of return for each of these investments. Compare
the arithmetic mean return and geometric mean return for each investment and
discuss this difference between mean returns as related to the standard deviation of