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Risk Return Problems

The document outlines various investment scenarios, including calculating total holding period yield (HPY) for shares of Chang Corporation, expected return for Lauren Computer Company, and analyzing the performance of two stocks over five years. It also discusses portfolio returns from U.S. government T-bills, bonds, and common stocks, including inflation impact and required rates of return. The document emphasizes the importance of different statistical measures such as arithmetic mean, standard deviation, and geometric mean in evaluating stock performance and risk.

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Ravindra Babu
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7 views2 pages

Risk Return Problems

The document outlines various investment scenarios, including calculating total holding period yield (HPY) for shares of Chang Corporation, expected return for Lauren Computer Company, and analyzing the performance of two stocks over five years. It also discusses portfolio returns from U.S. government T-bills, bonds, and common stocks, including inflation impact and required rates of return. The document emphasizes the importance of different statistical measures such as arithmetic mean, standard deviation, and geometric mean in evaluating stock performance and risk.

Uploaded by

Ravindra Babu
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
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1. At the beginning of last year, you invested $4,000 in 80 shares of the Chang Corporation.

During
the year, Chang paid dividends of $5 per share. At the end of the year, you sold the 80 shares for
$59 a share. Compute your total HPY on these shares and indicate how much was due to the
price change and how much was due to the dividend income.

2. A stockbroker calls you and suggests that you invest in the Lauren Computer Company. After
analyzing the firm’s annual report and other material, you believe that the distribution of
expected rates of return is as follows:
Lauren Computer Co.
Possible Rate of Probability
Return
-0.60 0.05
-0.30 0.20
-0.10 0.10
0.20 0.30
0.40 0.20
0.80 0.15
Compute the expected Return [E(Ri)]
3. During the past five years , you owned two stocks that had the following annual rates of
return:

year Stock Y Stock B


1 0.19 0.08
2 0.08 0.03
3 -0.12 -0.09
4 -0.03 0.02
5 0.15 0.04

a. Compute the arithmetic mean annual rate of return of the each stock. What stock is most desirable by this measure?
b. Compute the standard deviation of the annual rate of return for each stock. By this measure which is the
most preferable stock?
c. Compute the coefficient of variation for each stock. By this measure of risk, which is the most preferable?
d. Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean
return and the geometric mean return for each stock.
Discuss the differences in the mean returns relative to the standard deviation of the return of the each stock

4. During the past year, you had a portfolio that contained U.S. government T-bills, long term government
bonds, and common stocks. The rates of return on each of them were as follows:
U.S. government T-bills 5.50%
U.S. government long-term bonds 7.50
U.S. common stocks 11.60
During the year, the consumer price index, which measures the rate of inflation, went from 160 to 172
(1982 1984 100). Compute the rate of inflation during this year.
5. Assume that the consensus required rate of return on common stocks is 14 percent. In
addition, you read in Fortune that the expected rate of inflation is 5 percent and the estimated
long-term real growth rate of the economy is 3 percent. What interest rate would
you expect on U.S. government T-bills? What is the approximate risk premium for common
stocks implied by these data?
Compute the real rates of return on each of the investments in your portfolio based on the
inflation rate.

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