Case Study on Risk and Return
Powerline Network Corporation—Case Two: Risk and Return
Thomas Calderone, CJ Anderson, and Megan Wegener
FIN 480: Finance Capstone Course
Professor Randy Lewis
Spring Arbor University
February 7, 2013
Powerline Network Corporation: Risk and Return
Introduction
The topics of risk and return are crucial to financial management because it allows a company to maximize stock value—in which risk is a determinant value, the rate of return in which investors require on various types of securities depends on their individual risks; and common and preferred stocks, bonds, and mutual funds are use for multiple things—401 K plans, for example— and each incur a certain amount of risk that are inherent to the type of investment. It is also important to note that creating optimal portfolios vary from investor to investor and depend greatly on age, risk tolerance, and other characteristics unique to investors. The issues discussed in this case all refer back to these fundamentals of risk and return and dig in deep to what the PNC directors need to learn and focus on.
Issue One: Standard Deviation and Expected Return
The following assets will be evaluated on riskiness according to the calculations of expected returns, standard deviations, and coefficients of variations. These calculations portray the probability of the data and give us a decent idea of where and how the assets are distributed. According to the results of our calculations, in order from least risky to most risky, the assets rank as follows: T-Bills, Market, Outplace Inc., and Games Inc. Using the coefficient of variation in determining risk can prove to be a benefit because it allows the comparison of different investments. An advantage of using standard deviation to measure of risk is that it provides an indication of how far above or below the expected rate of return the actual return is. The asset with the larger standard deviation is considered riskier because it has larger dispersion of expected
Thomas Calderone, CJ Anderson, and Megan Wegener
FIN 480: Finance Capstone Course
Professor Randy Lewis
Spring Arbor University
February 7, 2013
Powerline Network Corporation: Risk and Return
Introduction
The topics of risk and return are crucial to financial management because it allows a company to maximize stock value—in which risk is a determinant value, the rate of return in which investors require on various types of securities depends on their individual risks; and common and preferred stocks, bonds, and mutual funds are use for multiple things—401 K plans, for example— and each incur a certain amount of risk that are inherent to the type of investment. It is also important to note that creating optimal portfolios vary from investor to investor and depend greatly on age, risk tolerance, and other characteristics unique to investors. The issues discussed in this case all refer back to these fundamentals of risk and return and dig in deep to what the PNC directors need to learn and focus on.
Issue One: Standard Deviation and Expected Return
The following assets will be evaluated on riskiness according to the calculations of expected returns, standard deviations, and coefficients of variations. These calculations portray the probability of the data and give us a decent idea of where and how the assets are distributed. According to the results of our calculations, in order from least risky to most risky, the assets rank as follows: T-Bills, Market, Outplace Inc., and Games Inc. Using the coefficient of variation in determining risk can prove to be a benefit because it allows the comparison of different investments. An advantage of using standard deviation to measure of risk is that it provides an indication of how far above or below the expected rate of return the actual return is. The asset with the larger standard deviation is considered riskier because it has larger dispersion of expected
References: Brewton, Linda. "CAPM Explained." eHow. N.p., n.d. Web. 6 Feb. 2013. <http://www.ehow.com/print/about_5501652_capm-explained.html>. fundamentalfinances.com. N.p., n.d. Web. 6 Feb. 2013. < economics.fundamentalfinances.com/capm.php>. Jadhav, Leena. "Security Market Line and Capital Market Line." Scribd.. N.p., n.d. Web. 6 Feb. 2013. <http://www.scribd.com/doc/38752472/Security-Market-Line-and-Capital-Market-Line-SML-CML>.