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2023 - Tutorial 7 Risk - Return - CAPM

This document contains sample questions and problems related to financial management concepts like risk and return. It includes examples of calculating total realized return, average realized return, standard deviation of returns, expected return, market risk premium, required rates of return for stocks with different betas, expected returns and standard deviations of stock returns, coefficient of variation, and portfolio required returns and standard deviations. The document provides information to help students practice applying these concepts to analyze stock and portfolio investments.

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Vanh Quách
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48 views4 pages

2023 - Tutorial 7 Risk - Return - CAPM

This document contains sample questions and problems related to financial management concepts like risk and return. It includes examples of calculating total realized return, average realized return, standard deviation of returns, expected return, market risk premium, required rates of return for stocks with different betas, expected returns and standard deviations of stock returns, coefficient of variation, and portfolio required returns and standard deviations. The document provides information to help students practice applying these concepts to analyze stock and portfolio investments.

Uploaded by

Vanh Quách
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FIN5FMA - FINANCIAL MANAGEMENT

TUTORIAL 7– RISK & RETURN


Student’s information:
Student’s name ......................................................................................................................................

Student’s ID...................................................Tutorial class.....................................................................

Tutor’s comments

Questions and problems

1. You are thinking of investing in Intermat Company. The following table shows the share price at the end
of each of the years shown, and dividends paid during the year. You decide to use the historical realized
return as an estimate of future expected return.

a. Calculate the total realized return each year


b. What is the average realized return on the share over this period?
c. What is the historical standard deviation of returns on the share over this period?
2. A stock’s returns have the following distribution:

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

3. Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the market
risk premium? What is the required rate of return on a stock with a beta of 0.7?

4. Stocks X and Y have the following probability distributions of expected future returns

a. Calculate the expected rate of return.


b. Calculate the standard deviation of expected returns.
c. Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y
as being less risky than Stock X? Explain.
5. Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks
with the following investments and betas

If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the fund’s required
rate of return?

6. Consider the following information for three stocks, Stocks X, Y, and Z. The returns on the three stocks
are positively correlated, but they are not perfectly correlated. (That is, each of the correlation
coefficients is between 0 and 1.)

Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the
market is in equilibrium. (That is, required returns equal expected returns.)

a. What is the market risk premium?


b. What is the expected return of Fund Q?
c. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater
than 15%? Explain.

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