Worksheet Assignment # 3 (1)

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Washington State University *

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101

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Finance

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Jan 9, 2024

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WORKSHEET ASSIGNMENT # 3 Risk and Return (9 points) Due by Monday, October 9 th , 11:59 pm (PT) Instructions Answer the questions in this worksheet as you attend the lectures. The questions on this worksheet are usually the same questions the class is answering during the lecture, so you will have the opportunity to work along with the lecture during class time. Upload the worksheet on Canvas when you have completed the questions. You will get a full answer sheet to check your working as soon as you upload your worksheet. You can keep this worksheet for yourself and use it to study for the exam or when completing the homework assignments. Grading You will receive full grades so long as you make a genuine attempt to answer the questions. A genuine attempt means that you must demonstrate that you have attended the lectures related to this particular worksheet. Given that the same questions are being answered during the lectures, your responses should reflect what is covered and provided in the lectures. Whenever calculations are required, you must show your working. Points will be deducted if you only give the final answer without showing your working regardless of giving the correct answer. So long as you make a genuine attempt (as explained above), points will not be automatically deducted when some of your responses are incorrect. Think of this as a chance to practice your new knowledge... and have fun! After you submit your worksheet, you will receive the correct answers in an announcement on Canvas. Make sure to compare your responses with the answer sheet to check your understanding of the material. Questions 1. Risk premium __ ? Future uncertainty (risk of time) __ ? Total risk __. 2. Risk premium __ ? Credit quality (level of risk) __ ? Total risk __. 3. What is the relationship between credit quality and total risk? 4. What is the relationship between the length of time invested and total risk? SPMGT 374 1
5. Would you purchase the Detroit Lions? Under what conditions? 6. Calculate the stand-alone expected ROR for the Jaguars: Projected return (k) (in Millions) Probability (P) Probable return (k x P) High $154.7 0.40 Average $134.5 0.40 Low $119.0 0.20 Expected ROR 7. Calculate the stand-alone expected ROR for the Dolphins: Projected return (k) (in Millions) Probability (P) Probable return (k x P) High $163.5 0.15 Average $142.5 0.50 Low $134.5 0.35 Expected ROR 8. Which franchise would you invest in? Do we have enough information to make this decision? 9. Calculate the Portfolio expected rate of return of the five franchises listed below: USE THE WHOLE NUMBER/ DON’T CONVERT INTO DECIMALS SPMGT 374 2
Investment Probability (k) Probable Return (w x k) Franchise A $200,000 0.2 10.0% 2% Franchise B $200,000 0.2 9.5% 1.9% Franchise C $200,000 0.2 11.5% 2.3% Franchise D $200,000 0.2 3.5% 0.7% Franchise E $200,000 0.2 6.0% 1.2% Total $1,000,000 Expected ROR 8.1% 10.Calculate the Portfolio expected rate of return when the Lions are added to the portfolio: Investment Probability (k) Probable Return (w x k) Franchise A $200,000 0.1 10.0% 1 Franchise B $200,000 0.1 9.5% 0.95 Franchise C $200,000 0.1 11.5% 1.15 Franchise D $200,000 0.1 3.5% 0.35 Franchise E $200,000 0.1 6.0% 0.60 Lions $1,000,000 0.5 7.0% 3.5 Total $2,000,000 Expected ROR 7.55% 11.Would you invest in the Lions? Why or why not? 12.Calculate the Expected ROR-SD for the Jaguars SPMGT 374 3
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Projected return (k) Proba bility (P) Deviations Deviations 2 Variance High $154.7 0.40 Average $134.5 0.40 Low $119.0 0.20 Expected rate of return $139.47 13.What is the range of dollar return that the Jaguars would fall in, approximately 95% of the time? Show your calculations. 14.Calculate the Expected ROR-SD for the Dolphins Projected return (k) Proba bility (P) Deviations Deviations 2 Variance High $163.5 0.15 Average $142.5 0.50 Low $134.5 0.35 Expected rate of return $142.8 15.What is the range of dollar return that the Dolphins would fall in, approximately 95% of the time? Show your calculations. SPMGT 374 4
16.Calculate the Coefficient of variation (CV) for the Jaguars 17.Calculate the Coefficient of variation (CV) for the Dolphins 18.Which franchise would you purchase? Why? 19.Calculate the Beta of Kates Portfolio Investment (in Millions) Beta Weighted Beta Team A $130 0.3 Team B $160 1.5 Facility C $70 3.2 Facility D $90 2.0 Team E $50 1.0 Total $500 Portfolio Beta 20.What rate of return should Kate expect from this portfolio? 21.Calculate the Beta of Donna’s Porfolio SPMGT 374 5
Investment (in Millions) Beta Weighted Beta Team F $100 0.5 Team E $100 1.0 Facility G $100 0.3 Total $300 Portfolio Beta 22.What rate of return should Donna expect from this portfolio? 23.Calculate the Beta of Donna’s Porfolio now that she has changed her investments in each team Investment (in Millions) Beta Weighted Beta Team F $90 0.5 Team E $160 1.0 Facility G $50 0.3 Total $300 Portfolio Beta 24.What rate of return should Donna expect from this portfolio? 25.Calculate the Beta of Donna’s Porfolio now that the Beta has changed for one of her investments Investment (in Millions) Beta Weighted Beta Team F $90 0.5 Team E $160 1.0 Facility C $50 3.2 Total $300 Portfolio Beta 26.What would Donna need to ensure in terms of her portfolio return to justify investing part of her portfolio in facility C? SPMGT 374 6
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