Lcture 3 and 4 Risk and Return
Lcture 3 and 4 Risk and Return
Lcture 3 and 4 Risk and Return
Q No. 1 Two stock prices for six days are given below.
Price A Price B
25 55
29 60
33 61
29 63
26 61
29 60
Calculate:
a) Calculate the expected rate of return and standard deviation for each investment?
b) Which investment would you prefer?
Q3. Use the data in the previous problem and consider a portfolio with weights of 0.70 in
stocks and 0.30 in bonds.
Use the data in the previous problem and consider a portfolio with weights of 0.60 in stocks
and 0.40 in bonds.
Q5.
a) A share of stock with a beta of .80 now sells for $45. Investors expect the stock to pay a
year-end dividend of $1.80. The T-bill rate is 4.5 percent, and the market risk premium is
7 percent. If the stock is perceived to be fairly priced today, what must be investors’
expectations of the price of the stock at the end of the year?
b) The following table shows betas for several companies. Calculate each stock’s expected
rate of return using CAPM. Assume the risk free rate of interest is 9 percent. Use a 6
Percent risk premium for the market portfolio.
Company Beta
Cisco 2.03
CitiGroup 1.63
Merck 0.50
Walt Disney 0.74
c) If the expected rate of return on the market portfolio is 14 percent and T- bills yield is 6
percent, what must be the beta of a stock that investors expect to return 10 percent?
d) You have equal investment in all four stocks given in part (b) of this question. What
would be your portfolio beta?
e) Student practice: Suppose you have investment as follows:
Cisco 20%
CitiGroup 20%
Merck 30%
Walt Disney 30%
Take the Beta as given above and calculate your portfolio beta.
Q No.6
Q No.7
Q No.8
Suppose you hold a diversified portfolio consisting of a $7500 investment in each of 20 different
common stocks. The portfolio beta is equal to 1.12. Now suppose you have decided to sell one of
the stocks in your portfolio with a beta equal to 1.0 for $7500 and to use these proceeds to buy
another stock for your portfolio. Assume the new stock’s beta is equal to 1.75. Calculate your
portfolio’s new beta.
ECRI Corporation is a holding company with four main subsidiaries. The percentage of its
business coming from each subsidiaries, and their respective betas, are as follows: