220 6-1. (Expected return and risk) Universal Corporation is planning to invest in a secu- LO1 LO2 rity that has several possible rates of return. Given the following probability distribu- tion of returns, what is the expected rate of return on the investment? Also, compute the standard deviations of the returns. What do the resulting numbers represent? PROBABILITY 0.10 0.20 0.30 RETURN -10% 5% 0.40 10% 25% 6-2. (Average expected return and risk) Given the holding-period returns shown here, calculate the average returns and the standard deviations for the Kaifu Corporation Myb and for the market. MONTH 1 2 3 KAIFU CORP. 4% 6% 0% 2% MARKET 2% 3% 1% -1% 6-3. (Expected rate of return and risk) Carter, Inc. is evaluating a security. Calculate the investment's expected return and its standard deviation. PROBABILITY 0.15 RETURN 6% 0.30 9% 0.40 10% 0.15 15% PART 2 The Valuation of Financial Assets 6-4. (Expected rate of return and risk) Summerville, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better based on the risk (as measured by the standard deviation) and return of each? COMMON STOCK A COMMON STOCK B PROBABILITY RETURN PROBABILITY RETURN 0.30 11% 0.20 -5% 0.40 15% 0.30 6% 0.30 19% 0.30 14% 0.20 22% 6-5. (Standard deviation) Given the following probabilities and returns for Mik's Corporation, find the standard deviation. PROBABILITY 0.40 0.25 0.15 0.20 RETURNS 7% 4% 18% 10% 6-6. (Expected return) Go to http://finance.yahoo.com/education. Go to Financial Glossary. Find the terms Expected Return and Expected Value in the glossary. What did you learn from these definitions? 6-7. Go to www.investopedia.com/university/beginner, where there is an article on "Investing 101: Introduction." Read the article and explain what it says about risk tolerance. LO3 6-8. Go to www.moneychimp.com. Select the link Volatility. Complete the retire- ment planning calculator, making the assumptions that you believe are appropriate for you. Then go to the Monte Carlo simulation calculator. Assume that you invest in large-company common stocks during your working years and then invest in long- term corporate bonds during retirement. Use the nominal average returns and stan- dard deviations shown in Figure 6-2. What did you learn? LO4 6-9. (Holding-period returns) From the price data that follow, compute the holding- period returns for periods 2 through 4. PERIOD 1 2 3 4 STOCK PRICE $10 13 11 15 6-10. (Computing holding-period returns) a. From the price data here, compute the holding-period returns for Jazman and Solomon for periods 2 through 4. PERIOD 1 2 JAZMAN SOLOMON $9 $27 11 28 10 32 13 29 b. How would you interpret the meaning of a holding-period return?

220 6-1. (Expected return and risk) Universal Corporation is planning to invest in a secu- LO1 LO2 rity that has several possible rates of return. Given the following probability distribu- tion of returns, what is the expected rate of return on the investment? Also, compute the standard deviations of the returns. What do the resulting numbers represent? PROBABILITY 0.10 0.20 0.30 RETURN -10% 5% 0.40 10% 25% 6-2. (Average expected return and risk) Given the holding-period returns shown here, calculate the average returns and the standard deviations for the Kaifu Corporation Myb and for the market. MONTH 1 2 3 KAIFU CORP. 4% 6% 0% 2% MARKET 2% 3% 1% -1% 6-3. (Expected rate of return and risk) Carter, Inc. is evaluating a security. Calculate the investment's expected return and its standard deviation. PROBABILITY 0.15 RETURN 6% 0.30 9% 0.40 10% 0.15 15% PART 2 The Valuation of Financial Assets 6-4. (Expected rate of return and risk) Summerville, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better based on the risk (as measured by the standard deviation) and return of each? COMMON STOCK A COMMON STOCK B PROBABILITY RETURN PROBABILITY RETURN 0.30 11% 0.20 -5% 0.40 15% 0.30 6% 0.30 19% 0.30 14% 0.20 22% 6-5. (Standard deviation) Given the following probabilities and returns for Mik's Corporation, find the standard deviation. PROBABILITY 0.40 0.25 0.15 0.20 RETURNS 7% 4% 18% 10% 6-6. (Expected return) Go to http://finance.yahoo.com/education. Go to Financial Glossary. Find the terms Expected Return and Expected Value in the glossary. What did you learn from these definitions? 6-7. Go to www.investopedia.com/university/beginner, where there is an article on "Investing 101: Introduction." Read the article and explain what it says about risk tolerance. LO3 6-8. Go to www.moneychimp.com. Select the link Volatility. Complete the retire- ment planning calculator, making the assumptions that you believe are appropriate for you. Then go to the Monte Carlo simulation calculator. Assume that you invest in large-company common stocks during your working years and then invest in long- term corporate bonds during retirement. Use the nominal average returns and stan- dard deviations shown in Figure 6-2. What did you learn? LO4 6-9. (Holding-period returns) From the price data that follow, compute the holding- period returns for periods 2 through 4. PERIOD 1 2 3 4 STOCK PRICE $10 13 11 15 6-10. (Computing holding-period returns) a. From the price data here, compute the holding-period returns for Jazman and Solomon for periods 2 through 4. PERIOD 1 2 JAZMAN SOLOMON $9 $27 11 28 10 32 13 29 b. How would you interpret the meaning of a holding-period return?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

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