2.

Investment Risk and Return Investment

2. Investment Risk and Return

Tutorial Questions:

1. The table below provides show the share price and dividends received:
Share price ($) Dividend ($)
1 Jan 2017 20.00 -
31 Dec 2017 22.00 0.80
31 Dec 2018 19.50 0.70
31 Dec 2019 20.80 0.75
(a) Compute the arithmetic annual rate of return for each time period separately.
(b) Compute the logarithmic annual rate of returns for each time period separately.
(c) Compute the geometric average rate of return for the entire time period (2017-2019).
(d) Compute the logarithmic annual rate of returns for entire time period (2017-2019).

MDIS-DMS 2-1 Investment

2. Investment Risk and Return Investment

2. The table below provides show the share price and dividends received:
Share price ($) Dividend ($)
1 Jan 2016 100 -
31 Dec 2016 108 2
31 Dec 2017 124 2
31 Dec 2018 142 2
31 Dec 2019 168 2
(a) Compute the arithmetic annual rate of return for each time period separately.
(b) Compute the logarithmic annual rate of returns for each time period separately.
(c) Compute the geometric average rate of return for the entire time period for 2016-2019.
(d) Compute the logarithmic annual rate of returns for the entire time period for 2016-2019.

MDIS-DMS 2-2 Investment

2. Investment Risk and Return Investment

3. The table below provides the probability of different states occurring and the respective
returns.
State Probability of State Return(%) in State
Excellent 0.25 35.00
Good 0.35 19.00
Poor 0.30 1.80
Crash 0.10 -52.00
(a) Compute the expected return.
(b) Compute the standard deviation.

MDIS-DMS 2-3 Investment

2. Investment Risk and Return Investment

4. The table below provides the return for Ace and Base given the different state of the
economy.
State Probability of State Returns for Ace Returns for Base
Excellent 0.25 19% 12%
Good 0.60 11% 9%
Poor 0.15 4% 6%
Compute:
(a) expected return for Investment Ace and Base separately
(b) standard deviation for Investment Ace and Base separately
(c) correlation between Investment Ace and Base. (Lesson 3)

MDIS-DMS 2-4 Investment

2. Investment Risk and Return Investment

5. The table below provides the return for Atlantic and Pacific given the different state of the
economy.
State Probability Atlantic Pacific
Excellent 0.20 19% 12%
Good 0.50 11% 9%
Poor 0.30 4% 6%
Compute:
(a) expected return for investment in Atlantic and Pacific separately.
(b) standard deviation for investment in Atlantic and Pacific separately.
(c) correlation between Atlantic and Pacific.

MDIS-DMS 2-5 Investment