Risk and Return, PLEASE SHOW WORK IN EXCEL SO THAT I CAN LEARN
Note on reading Ch. 11: you will not calculate standard deviation/variance using formulas – you will use Excel. You can skim over the parts of the chapter that explain and illustrate the formulas. This will substantially reduce your reading time.
Why are large portfolios less risky than individual stocks (in general)?
What would comprise a true market portfolio?
Why is the CAPM determined return considered to be more accurate than the return determined by standard deviation?
Problems to submit in Excel
1. You had $1000 in your account.
a. In the first quarter, your account lost 10% of its value. What do you have left in your account?
b. If your account gains 10% in the second quarter, what do you have in your account?
c. What rate of return do you need to make in the second quarter to return your account to $1000?
2. You buy a stock for $25 and sell it a year later for $30. You also receive a dividend of $1 at the end of the year. What is the dividend yield, capital gains yield and realized return from this stock?
3. The Terrapins Investment Fund has a total investment of $500 million in five stocks.
Stock Investment (millions) Beta
1 $150 .6
2 120 1.2
3 80 3.0
4 90 1.8
5 60 1.0
Total $500
What is the fund’s overall, or weighted average, beta?
4. Refer to the previous problem. If the risk-free rate is 12% and the market risk premium is 6%, what is the required return on the Terrapins Fund?
5. Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:
A. What is the expected return of MGM stock?
B. What is the expected return of AEP stock?
C. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?
D. What is the expected return of that portfolio with the beta that you found in part c.?
E. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?