EMBA: Principles of Finance

Risk & Return

Question # 1:
Consider the following information of two companies:
Return of A Return of B Probability
Recession 0% 25% .20
Normal 20% 15% .40
Expansion 35% 5% .40

a. Calculate the expected return and standard deviation of A & B.

b. Calculate the expected return of portfolio A & B with 60% and 40% weights
respectively.

Question # 2:

a. Security X has an expected return of 18.5%, the risk-free rate is 5%, and the market
risk premium is 9%. What is the beta for security X?

b. TEE-rific Shirts Inc. has a required rate of return of 16.5% and a beta of 1.50. If the
expected return on the market is 13%, what is the risk-free rate of return?

Question # 3:

Use the information provided to answer the questions that follow.

Asset A:
Outcome Return Probability
Pessimistic 18% 20%
Ordinary 26% 50%
Optimistic 34% 30%

Asset B:
Expected Return = 30%
Range = 20%
Standard Deviation = 14%
Coefficient of Variation = 0.47

Calculate the expected return, the range, the standard deviation, and the coefficient of
variation for asset A. Compare the values you calculated for A to those provided for B. Which
security do you think is preferred by the risk averse investor? Why?

Question # 4:

What is the expected return for the Bollmann Manufacturing Company?

Return Probability
Recession 0% .20
Normal economy 20% .40
Economic expansion 35% .40

What is the standard deviation of returns for the Bollmann Manufacturing Company?

What is the coefficient of variation of returns for the Bollmann Manufacturing Company?