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Week Six Assignment: Risk/Return Analysis
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For Linda Week Six Assignment: Risk/Return Analysis

Problem 1.

The risk and return profiles of Assets P and Q are given below along with the assigned probability distributions.

Economy Probability Possible Returns on P Possible Return on Q Boom .20 .19 .15 Normal .60 .15 .11 Recession .20 - .04 .05

Required: Given the above information,

a. Compute the expected return and standard deviation for each asset. b. Which asset is riskier based on your calculation? Why? c. Which asset would you choose for investment purposes? Why?

Problem 2.

State Probability Possible Returns on Market Possible Returns on Project 1 .05 -.20 -.30 2 .25 .10 .05 3 .35 .15 .20 4 .20 .20 .25 5 .15 .25 .30

Required: Given the above information, a. Calculate the expected return for the Market and Project and discuss your results. b. Calculate the variance for the Market and Project and discuss your results. c. Calculate the Standard Deviation for the Market and Project and interpret your results. d. Determine the covariance between the Market and Project and discuss your results. e. Determine the correlation co-efficient between the Market and Project and discuss your results. f. What conclusions can you derive from parts a through e? Problem 3.

Investment A Investment B

Probability Return Probability Return Boom .25 .35 .25 .20 Normal .55 .20 .55 .15 Recession .20 -.05 .20 .08

Required: Given the above information,

a. Calculate the expected return and standard deviation for each alternative and discuss your results. b. Calculate the portfolio expected return and standard deviation if you invested 40% of your money in Investment A and the remaining 60% in Investment B. c. Determine the effect on the expected return and standard deviation of your portfolio if you instead decided to invest 20% of your funds in A and 80% in B. d. What conclusions can you derive from your calculations?

Problem 4.

Suntech, Inc., expects to pay a $2.40 dividend next year (D1=$2.40) and the dividend is expected to grow at 4% annually. Suntech has an estimated standard deviation of 24 percent, the market portfolio has a standard deviation of 12 percent, the market expected return is 13 percent and the risk free-free rate is 5 percent. The correlation between Suntech and Market returns is 0.8.

Required: Given the above information,

a. What is Suntech’s beta? b. What is the required rate of return based on the CAPM? c. What is the value of a share of Suntech’s stock? d. Discuss your results.