Risk and Rates of Return – Tutorial Questions

1.

Probability X Y

0.1 -10 -35

0.2 2 0

0.4 12 20

0.2 20 25

0.1 38 45

Required

a) Calculate the expected return for both stock X and Y.

b) Calculate standard deviation of expected returns for stock X and Y.
c) Calculate the coefficient of variation of each stock
d) Which stock is more risky? Explain

Question 2.

Assume that you can invest in

any of the following three
securities today. You will hold
them for
a year, however, there is
uncertainty about how well
your investments will do over
the ensuing
Assume that you can invest in
any of the following three
securities today. You will hold
them for
a year, however, there is
uncertainty about how well
your investments will do over
the ensuing
The returns for each of the security in the three states of nature are given below.

Nature Probability Stock A Stock B Market

Below Average .34 19% 0% 5%

Average .34 3% 12% 10%

Above Average .32 23% 20% 15%

Required

a) Calculated the expected return for stocks A and B

b) What is variance of stock A and B
c) Calculate the standard deviation of stock A and B
d) Assuming an investor chooses to invest 40% of his income in stock A and 60% in
market.
i. What is the expected portfolio rate of return?
ii. Portfolio variance
iii. Portfolio standard deviation