Asset Allocation Process & Securities Markets

Handout # 2
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Q1:
Consider an investment that has cost of $ 250 and is worth $ 350 after being held for 2 years, whereas
another investment has a cost of $ 200 and is worth $ 220 after 1 year. In contrast, consider an
investment of $ 100 held only for 6 months that earned a return of $ 12. What are the HPR and HPY for
three investments?

Q2:
Consider the following information for an equity stock: beginning price, PB = $ 60, DPS = $ 2.40 and
ending price, PE = $ 69. Calculate the total return and relative return on this stock. Is there any difference
between relative return and HPR? Explain.

Q3:
Consider an investment with the following data:
US $
Investment Beg. Price End. Price
A 10 12
B 20 21
C 30 33
Further assume that capital investment of $ 20 million was made in above stocks split 5%, 20% and 75%
in stocks A, B and C respectively. Calculate the HPR, HPI for each individual stock and for the portfolio.

Q4:
Consider the total return and relative return for stock A over a 5 year period:

Year Total return % Relative return %

1 19 1.19
2 14 1.14
3 22 1.22
4 -12 0.88
5 5 1.05
Calculate arithmetic and geometric mean for stock A.

Q5:
Suppose common stock of MTC Pharma has an expected return of 15% in each year with a standard
deviation of 20%. Assume that there are two equally possible outcomes each year, +45% and -15%. An
investment of $ 1 in this stock would grow over a two year period as follows:
Initial Growth Probability
1 2.1 0.25
1.23 0.50
0.72 0.25
Calculate the arithmetic and geometric mean on the above investment. Also calculate the expected
value of all possible outcomes.

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 Asset Allocation Process & Securities Markets
Handout # 2
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Q6:
Total return for the equity stock for 1 year was 18.5%, whereas inflation rate during this period was
5.5%. What is the real rate of return on this stock?

Q7:
Consider the data of returns from a stock over a six year period: year 1, 15%; year 2, 12%; year 3, 20%;
year 4, -10%; year 5, 14%; year 6, 9%. Calculate the variance and standard deviation of returns.

Q8:
Probability distribution of the rate of return on BF Foods Inc., and OJ Foods Inc., are given in the grid
below.
Rate of Return %

State of the Probability of

economy occurrence BF Foods OJ Foods
Boom 0.3 16 40
Normal 0.5 11 10
Recession 0.2 6 -20
Based on probability distribution, calculate the expected rate of return, standard deviation of returns
and coefficient of variation on both the stocks. Which stock is better?

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