Risk Return Analysis – Practice Problems

Holding Period Return (HPR) and Dividend yield

1. If you commit $200 to an investment at the beginning of the year and you get back $220 at
the end of the year, what is your return for the period?
2. On February 1, you bought 100 shares of a stock for $34 a share and a year later you sold it
for $39 a share. During the year, you received a cash dividend of $1.50 a share. Compute your
HPR and Dividend yield on this stock investment.
3. On August 15, you purchased 100 shares of a stock at $65 a share and a year later you sold it
for $61 a share. During the year, you received dividends of $3 a share. Compute your HPR
and dividend yield on this investment.
4. At the beginning of last year, you invested $4,000 in 80 shares of the Chang Corporation.
During the year, Chang paid dividends of $5 per share. At the end of the year, you sold the 80
shares for $59 a share. Compute your total HPY on these shares and indicate how much was
due to the price change and how much was due to the dividend income.
5. Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during
the year, and had an ending share price of $102. Compute the percentage total return.
6. You purchased a share of stock for $20. One year later you received $1 as a dividend and sold
the share for $29. What was your holding-period return?

Recommended Videos
Components of Return: https://youtu.be/thxZ1OtnILI
Percentage Return: https://youtu.be/g3Q_hhd3EIs
Dividend Yield: https://youtu.be/VnVSw9QcxFc
Total Return: https://youtu.be/Mf4L5zTKVkM

Components of Risk: https://youtu.be/TlFwhQSb0r8

Unsystematic Risk: https://youtu.be/ZDzbCvZQ0PM
Systematic Risk: https://youtu.be/gaHbBbYyRpk

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 Risk Return Analysis – Practice Problems

Ex-ante return
1. You have been given this probability distribution for the holding-period return for KMP stock:

What is the expected holding-period return for KMP stock?

2. Using the probability distribution shown below, calculate Stock XYZs expected return, E(r)
State of the Economy Probability of Economic State Return in Economic State
Recession 45% –10%
Steady 35% 12%
Boom 20% 20%
3. You have invested in a ski resort that has the following distribution of returns under
different snow conditions:
POSSIBLE SNOW PROBABILITY OF RATE OF RETURN
CONDITIONS THIS CONDITION UNDER THIS CONDITION
Poor .10 .03
Fair .30 .07
Good .40 .10
Excellent .20 .18

What is the expected value of return on your investment?

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Arithmetic average Geometric average

1. A stock has had returns of 3 percent, 38 percent, 21 percent, -15 percent, 29 percent, and -13
percent over the last six years. What are the arithmetic and geometric returns for the stock?
2. What is the arithmetic mean geometric mean of 0.04,0.08.0.03,0.09 and 0.17?

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 Risk Return Analysis – Practice Problems

3. Let’s say you own a piece of art that increases in value by 50% the first year after you buy it,
20% the second year, and 90% the third year. What is the arithmetic and geometric average
of these return series.
4. Assume that we have a 6-year sequence of investment returns as follows:
{40% -30% 40% -30% 40% -30%}
What is the arithmetic and geometric average of these return series.
Recommended Video
https://youtu.be/ylnxGE7zmRs

Variance, covariance & correlation

1. In a table of data with two columns, let the variable X represent the temperature, in degrees
Fahrenheit, and the variable Y represents the number of cricket-chirps per minute. Then, using
statistical formulas, we come up with the standard deviation of X as 20 degrees Fahrenheit
and the standard deviation of Y as 25 chirps per minute. The covariance of X and Y is
calculated as COV(X, Y) = 485 degrees X chirps per minute. Calculate the correlation
coefficient, r, for this experiment, and state whether there is a strong linear relation between
X and Y. (Ans. 0.97).
2. Given 5-K race data between the runner's age, A, in years, and finishing time, B, in minutes,
we obtain the following information: COV(A, B) = 5, the standard deviation of A is 7 years,
and the standard deviation of B is 3.6 minutes. Does this data indicate a strong relationship
between age and finishing time? (Ans. 0.20)
3. Consider two securities, A and B. Securities A and B have a correlation coefficient of 0.65.
Security A has a standard deviation of 12% and security B has a standard deviation of 25%.
Calculate the covariance between the two securities. (Ans. 195)

Recommended Videos
Covariance: https://youtu.be/bl-3JRjde74
Correlation introduction: https://youtu.be/7k1wgXvmKyk
Correlation calculation: https://youtu.be/qBc3sudqlO4

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 Risk Return Analysis – Practice Problems

Portfolio Return

1. Suppose you have a portfolio comprised of two securities. You have 60 shares of the stock X
valued at $10 per share and 40 shares of stock Y valued at $3 per share. What is the weight of
stock X in the portfolio?

2. Consider a portfolio comprised of two stocks A and B:

The estimates shown below are given in percentage format for the expected return, E(R), and
standard deviation of returns (SD).
Stock Weight E(R) SD
A 0.40 16% 45%
B 0.60 12% 30%
The correlation between stocks A and B is .75.
Calculate the portfolio expected return and standard deviation

3. You own a portfolio that has $2,950 invested in Stock A and $3,700 invested in Stock B. If the
expected returns on these stocks are 11 percent and 15 percent, respectively, what is the expected
return on the portfolio?

4. You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15 percent
in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent,
respectively. What is the expected return on the portfolio?

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Portfolio Variance: https://youtu.be/eQyIqXCusJ8

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 Risk Return Analysis – Practice Problems

CAPM
1. Assuming that the capital-asset pricing model approach is appropriate, compute the required
rate of return for each of the following stocks. Assume a risk-free rate of .08 and an expected
return for the market portfolio of .13.
STOCK A B C D
BETA 2.0 1.5 1 .7
2. Suppose the current risk-free is 7.6 percent. Potpourri Inc. stock has a beta of 1.7 and an
expected return of 16.7 percent. (Assume the CAPM is true)
a. What is the risk premium on the market?
b. Magnolia Industries stock has a beta of 1.8. What is the expected return on the Magnolia stock?

3. A stock has a beta of 1.05, the expected return on the market is 11 percent, and the risk-free
rate is 5.2 percent. What must the expected return on this stock be?
4. A stock has an expected return of 10.2 percent, the risk-free rate is 4.5 percent, and the market
risk premium is 8.5 percent. What must the beta of this stock be?

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