Risk & Return

Risk and Return
Assignment Questions

1. Suppose a stock begins the year with a price of $25 per share and ends with a price of $35 per share. During the year it paid a $2 dividend per share. What are its dividend yield, its capital gain, and its total return for the year?

2. An investor receives the following dollar returns a stock investment of $25:
$1.00 of dividends
Share price rise of $2.00
Calculate the investor’s total return.

3. Below are the probabilities for the economy’s five possible states next year, with the corresponding returns on the market and on Trebli, Inc., stock

Economic Condition
Probability
Market Return
Trebli Return
Rapid expansion
0.12
0.23
0.12
Moderate expansion
0.40
0.18
0.09
No growth
0.25
0.15
0.05
Moderate contraction
0.15
0.09
0.01
Serious contraction
0.08
0.03
-0.02

a. What is the expected return on the market?
b. What is the expected return on the Trebli stock?

4. Tabulated below are the returns from 1935 through 1939 on small-company stocks and on the large-company common stocks.

Year
Small Company Stocks (%)
Large Company Common Stocks (%)
1935
47.7
46.9
1936
33.9
32.4
1937
-35.0
-35.7
1938
31.0
32.3
1939
-0.5
-1.5

a. Calculate the average return for the small company stocks and large company common stocks.
b. Calculate the variance and standard deviation of the small company returns and large company common returns.

5. The table below provides a probability distribution for the returns on stocks A and B
State
Probability
Return On Stock A Return OnStock B
1
20%
5%
50%
2
30%
10%
30%
3
30%
15%
10%
4
20%
20%
-10%

a. Given a probability distribution of returns, calculate the expected return, variance, standard deviation of Stock A and Stock B.
b. The weighted portfolio of stock A and stock B is 50% calculate the expected return, covariance and correlation coefficient of the portfolio.

6. Mr.