RISK AND RETURN

1. A share is currently selling at Rs. 50. It is expected that a dividend of Rs. 2 per share would be paid
during the year and the share could be sold for Rs. 54 at the end of the year. Calculate the
expected return from the share.

2. Calculate the expected return and standard deviation of returns for a stock having the following
probability distribution of returns.
Possible
Probability of
Returns (in
Occurrence
percent)
30 0.10
40 0.30
50 0.40
60 0.10
70 0.10

3. An investor has analysed a share for a one year holding period. The share is currently selling for
Rs. 43 but pays no dividends and there is an equal chance that the share will sell for either Rs. 55
or Rs. 60 by the year end. What is the expected return and risk if 250 shares are acquired with 80
percent borrowed funds? Assume the cost of borrowed funds to be 12 percent (ignore commissions
and taxes).

4. Monthly return data (in percent) for ONGC stock and the NSE index for a 12-month period are
presented below:

Month ONGC NSE Index

1 -0.75 -0.35
2 5.45 -0.49
3 -3.05 -1.03
4 3.41 1.64
5 9.13 6.67
6 2.36 1.13
7 -0.42 0.72
8 5.51 0.84
9 6.80 4.05
10 2.60 1.21
11 -3.81 0.29
12 -1.91 -1.96

a) Calculate alpha and beta for ONGC stock

b) Suppose NSE index is expected to move up by 15 percent next month, how much return would you
expect from ONGC?