Project #61820 - Fundamentals of Finance Unit 4 (2 Assignments)

Unit 4 Assignment #1

 

Characterizing Risk and Return

Introduction

This assignment emphasizes the risk and return relationship. Every investment carries a different level of risk and return. In this assignment, you will learn about different measures of risk and how to compare risk with the return. In addition, you will differentiate between stand-alone risk and portfolio, or market, risk.

Instructions

Answer the following questions and complete the following problems, as applicable:

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Also answer each Distinguished level question (D:)

1.      How do Cornett, Adair, and Nofsinger define risk in the M: Finance textbook and how is it measured?

D: and describes the risk relationship between stocks, bonds, and T-bills, using the standard deviation of returns as the measure of risk.

 

2.      "What is the source of firm-specific risk? What is the source of market risk" (Cornett, Adair, & Nofsinger, 2014, p. 225)?

D: and identifies which of the two types of risk can be reduced through diversification.

 

3.      "What does the coefficient of variation measure" (Cornett, Adair, & Nofsinger, 2014)?

D: and explains why a lower coefficient of variation is better for an investor.

 

4.      "FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 300 shares of FedEx, what was your dollar return and percent return" (Cornett, Adair, & Nofsinger, 2014, p. 226)?

D: and explains why a percentage return can be more useful than a dollar return.

 

5.      "Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent" (Cornett, Adair, & Nofsinger, 2014, p. 226).

D: and describes the components of the standard deviation formula.

 

6.      "Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent" (Cornett, Adair, & Nofsinger, 2014, p. 226).

·         Before solving this problem, calculate the coefficient of variation.

D: and explains how the coefficient of variation acts as a trade-off between risk and return.

 

7.      "Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 20 percent Valero Energy, and 50 percent McDonald's, what is your portfolio return" (Cornett, Adair, & Nofsinger, 2014)?

D: and explains the role of weights in determining portfolio return.

 

Submit your completed assignment in a Word document.

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill.

 

 

 

 

 

Unit 4 Assignment #2

 

 

Estimating Risk and Return

 

Introduction

In this assignment, you will learn how to calculate risk and return, and how to interpret the results. The focus of this assignment is the Capital Asset Pricing Model (CAPM). After completing the assignment, you will be able to apply the CAPM to any stock or portfolio valuation, understand the concept of the beta of a stock, and understand a portfolio.

 

Instructions

Answer the following questions and complete the following problems, as applicable:

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

 

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

 

  1. "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return" (Cornett, Adair, & Nofsinger, 2014, p. 250)?

D: and explains the role of probability distribution in determining expected return.

 

  1. "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired" (Cornett, Adair, & Nofsinger, 2014).

D: and provides examples of a portfolio for someone who is very risk averse and for someone who is less risk averse.

 

  1. Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns" (Cornett, Adair, & Nofsinger, 2014).

D: and recalculates the expected return under a set of changed economic probabilities.

 

  1. "If the risk-free rate is 6 percent and the risk premium is 5 percent, what is the required return" (Cornett, Adair, & Nofsinger, 2014, p. 251)?

D: and identifies which financial security's return is typically considered the risk-free rate.

 

  1. "The average annual return on the Standard and Poor's 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years" (Cornett, Adair, & Nofsinger, 2014, p. 251)?

D: and defines, in his or her own words, the term, market risk premium.

 

  1. "Hastings Entertainment has a beta of 0.24. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings' required return" (Cornett, Adair, & Nofsinger, 2014, p. 251)?
    • Use the capital asset pricing model to calculate Hastings' required return.

D: and recalculates the required return with a change to beta, and explains the effect of a 1.0 increase in beta on the subsequent amount of change in required return.

 

  1. Calculate the beta of your portfolio, which comprises the following items: (a) Olympic Steel stock, which has a beta of 2.9 and comprises 25 percent of your portfolio, (b) Rent-a-Center stock, which has a beta of 1.5 and comprises 35 percent of your portfolio, and (c) Lincoln Electric stock, which has a beta of 0.2 and comprises 40 percent of your portfolio (Cornett, Adair, & Nofsinger, 2014).

D: and determines whether the portfolio has less risk, equal risk, or more risk, compared to the overall market.

 

 

 

Economic State

Probability

Return

Fast Growth

0.30

40%

Slow Growth

0.50

10%

Recession

0.20

−25%

     

 

 

Submit your completed assignment in a Word document.

 

 

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill.

 

 

Subject Mathematics
Due By (Pacific Time) 03/13/2015 09:00 pm
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