Tutorial 1: Risk and Return 1. Expected return. A stock’s returns have the following distribution: Demand for the company’s product | Probability of this demand occurring | Rate of return if this demand occurs | Weak | 0.1 | (50%) | Below average | 0.2 | (5%) | Average | 0.4 | 16 | Above average | 0.2 | 25 | strong | 0.1 | 60 | | 1.0 | |
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September 17‚ 2012 The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold‚ ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the
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................................................. 2 Chapter 2 Consensus Expected Returns: The CAPM ..................................................... 3 Chapter 3 Risk ................................................................................................................. 3 Chapter 4 Exceptional Return‚ Benchmarks‚ and Value Added...................................... 5 Chapter 5 Residual Risk and Return: The Information Ratio ......................................... 6 Chapter 6 The Fundamental
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portfolio return‚ the risk free rate of return - use the average return (over the given period of time). the standard deviation of the portfolio – it is measure the systematic risk of the portfolio. The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset Properly compensated for the additional risk you take for not holding a risk-free asset CONDITIONS • Return (rp): • The returns measured can
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Solutions to Chapter 10 Introduction to Risk‚ Return‚ and the Opportunity Cost of Capital capital gain + dividend ($44 − $40) + $2 = = 0.15 = 15.0% initial share price $40 1. Rate of return = Dividend yield = dividend/initial share price = $2/$40 = 0.05 = 5% Capital gains yield = capital gain/initial share price = $4/$40 = 0.10 = 10% 2. Dividend yield = $2/$40 = 0.05 = 5% The dividend yield is unaffected; it is based on the initial price‚ not the final price. Capital gain = $36 – $40
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earn significantly positive announcement period returns. By contrast‚ acquiring firm bonds earn negative announcement period returns. Additionally‚ target bonds have significantly larger returns when the target’s rating is below the acquirer’s‚ when the combination is anticipated to decrease target risk or leverage‚ and when the target’s maturity is shorter than the acquirer’s. Finally‚ we find that target and acquirer announcement period bond returns are significantly larger in the 1990s. U.S. COMPANIES
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Answers to Warm-Up Exercises E8-1. Total annual return Answer: ($0 $12‚000 $10‚000) $10‚000 $2‚000 $10‚000 20% Logistics‚ Inc. doubled the annual rate of return predicted by the analyst. The negative net income is irrelevant to the problem. E8-2. Expected return Answer: Analyst 1 2 3 4 Total Probability 0.35 0.05 0.20 0.40 1.00 Return 5% 5% 10% 3% Expected return Weighted Value 1.75% 0.25% 2.0% 1.2% 4.70% E8-3. Comparing the risk of two investments Answer: CV1 0.10 0.15 0.6667 CV2 0.05
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The purpose of this paper is to examine the relevance from the modern portfolio theory to the global investment market. Some of the questions that related to the use of techniques about the portfolio theory and it’s relation to risk and return will be discussed in terms of solving the complexity of the portfolio problems faced by investor and how to make a decision based on the investment analysis. By choosing 5 random company’s stocks for one month period under the FTSE100 that taken
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rates of return? A. risk premium B. geometric return C. arithmetic D. standard deviation E. variance 2. Which one of the following best defines the variance of an investment’s annual returns over a number of years? A. The average squared difference between the arithmetic and the geometric average annual returns. B. The squared summation of the differences between the actual returns and the average geometric return. C. The average difference between the annual returns and the average return for the
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their probabilities and associated outcomes. RETURNS ON ALTERNATIVE INVESTMENTS ESTIMATED RATE OF RETURN State Of the Economy Probability T-bills High Tech Collections U.S. Rubber Market Portfolio 2-stock-portfolio Recession 0.1 5.5% -27.0% 27% 6% -17% 0% Below Average 0.2 5.5% -7% 13% -14% -3% Average 0.4 5.5% 15% 0 3% 10% 7.50% Above Average 0.2 5.5% 30% -11% 41% 25% Boom 0.1 5.5% 45% -21% 26% 38% 12% r(hat) - expected return 1.00% 9.80% 10.50% σ (std deviation) 0.0%
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