Managing the Value Chain
Unit 4 Assignments
Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of - 0.25, and a beta coefficient of - 0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?
In order to answer this question you need to outline Security A and Security B
Security A
Expected rate of return of 6%
Standard deviation of returns of 30%
Correlation coefficient with the market of -0.25
Beta coefficient of -0.5
Security B
Expected rate of return of 11%
Standard deviation of returns of 10%
Correlation coefficient with the market of -0.75
Beta coefficient of 0.5
It looks like security B is more risky because it has about the same as market return. Anything with positive beta has high risk compare to the one with negative beta. Stock analysis use beta to measure stock risk. High . A negative beta implies that security A would stabilize the returns on a portfolio since the returns on A are negatively correlated to the market.
The riskiness of a portfolio is determined by its beta value. Security A has a negative beta (-0.5), which makes it less risky when compared with positive beta value for security B (0.5). In addition, if we consider a standalone risk, standard deviation plays an important role.
It is used as an indicator of risk, security A has 30% standard deviation which makes it more risky than security B.
Chapter 24 problem, 24-8, p. 966-967
Historical Rates of Return Year NYSE Stock Y
1 4.0% 3.0%
2 14.3 18.2
3 19.0 9.1
4 - 14.7 - 6.0
5 - 26.5 - 15.3
6 37.2 33.1
7 23.8 6.1
8 - 7.2 3.2
9 6.6 14.8
10 20.5 24.1
11 30.6 18.0
Mean = 9.8% 9.8% ? = 19.6% 13.8%
Question A:
Construct a scatter diagram showing the relationship between returns on Stock Y
Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of - 0.25, and a beta coefficient of - 0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?
In order to answer this question you need to outline Security A and Security B
Security A
Expected rate of return of 6%
Standard deviation of returns of 30%
Correlation coefficient with the market of -0.25
Beta coefficient of -0.5
Security B
Expected rate of return of 11%
Standard deviation of returns of 10%
Correlation coefficient with the market of -0.75
Beta coefficient of 0.5
It looks like security B is more risky because it has about the same as market return. Anything with positive beta has high risk compare to the one with negative beta. Stock analysis use beta to measure stock risk. High . A negative beta implies that security A would stabilize the returns on a portfolio since the returns on A are negatively correlated to the market.
The riskiness of a portfolio is determined by its beta value. Security A has a negative beta (-0.5), which makes it less risky when compared with positive beta value for security B (0.5). In addition, if we consider a standalone risk, standard deviation plays an important role.
It is used as an indicator of risk, security A has 30% standard deviation which makes it more risky than security B.
Chapter 24 problem, 24-8, p. 966-967
Historical Rates of Return Year NYSE Stock Y
1 4.0% 3.0%
2 14.3 18.2
3 19.0 9.1
4 - 14.7 - 6.0
5 - 26.5 - 15.3
6 37.2 33.1
7 23.8 6.1
8 - 7.2 3.2
9 6.6 14.8
10 20.5 24.1
11 30.6 18.0
Mean = 9.8% 9.8% ? = 19.6% 13.8%
Question A:
Construct a scatter diagram showing the relationship between returns on Stock Y