HOLDING PERIOD RETURN
ITEMS 1-2
One year ago, Lee Min Ho purchased 100 shares of Apexspace, Inc. common stock for $25 per share. During the
year, Apexspace, Inc. paid cash dividends of $2 per share.
1. Currently, the stock is selling for $30 each share. What rate of return would Lee Min Ho get if he sold
all of his Apexspace, Inc. shares today?
2. Assuming instead of $30, the stock is currently selling for $40. What rate of return would Lee Min Ho
get if he sold all of his Apexspace, Inc. shares today?
ITEMS 3-4
Six months after being purchased for $32,360, Asset ABC has produced $1,850 in cash flow during the period. If
the asset can be sold for $45,740 today,
3. what is its rate of return?
4. Assuming, it has produced an additional cash flow of 1,200, what is its rate of return?
ITEM 5
For P325,000, Herwi Snitch Corporation bought the snitch rotator a year ago. All year long its cash flow of
P120,000 was produced. Ralph might get P305,000 for it if he sells it.
5. What is snitch rotator’s rate of return?
EXPECTED RETURN, STANDARD DEVIATION AND COEFFICIENT OF VARIATION
ITEMS 6-7
Refer to the following returns and corresponding probabilities for Asset Q.
Rate of Return
Probability
10%
15%
20%
50%
Compute for:
6. Expected return of Asset Q
7. Variance
8. Standard Deviation
ITEMS 9-12
30%
20%
Flasky Cheweries must decide between buying one of the two assets. The annual rate of return and related
probabilities below represents the firm's analysis.
ASSET A
Rate of Return
10%
15%
20%
ASSET B
Probability
30%
40%
30%
Rate of Return
5%
15%
25%
Probability
40%
20%
40%
For each asset, compute the following:
9.
10.
11.
12.
Expected return
Standard deviation of the expected return
The coefficient variation of the return
Which asset should Flasky Cheweries select?
ITEMS 13-16
Shie Tela Co. is in process of purchasing a high-tech machine. In their search, they have gathered the following
information about two possible machines: A and B.
Initial Investment
Annual
Pessimistic
Most likely
Optimistic
A
10,000
rate
Return
11%
18%
22%
Probability
0.30
0.45
0.25
For each machine, compute for:
13.
14.
15.
16.
The expected return
Variance and standard deviation of rate of return
The coefficient variation of return
Which machine should Shie Tela Co. purchase?
ITEMS 17-20
B
10,000
of
Return
9%
18%
25%
return:
Probability
0.30
0.45
0.25
Presented below is the probability distribution for assets X and Y:
ASSET X
Rate of Return
8%
9%
11%
12%
ASSET Y
Probability
10%
20%
30%
40%
Rate of Return
10%
11%
12%
Probability
25%
35%
40%
For each machine, compute for:
17.
18.
19.
20.
The expected return
Variance
Standard deviation
Coefficient variation
SHARPE RATIO
ITEMS 21-24
Refer to the following information:
Expected Return
Risk-free rate
Standard Deviation
21.
22.
23.
24.
PORTFOLIO A
22%
16%
23%
PORTFOLIO B
16%
10%
19%
PORTFOLIO
19%
13%
15.5%
C
Sharpe ratio of Portfolio A
Sharpe ratio of Portfolio B
Sharpe ration of Portfolio C
Which of the following common stock portfolios is best for a conservative, risk-averse investor?
PORTFOLIO RETURN
ITEM 25
Vinci has three assets in his portfolio. If he puts half of the money in asset A, which has a return of 10%, 30% in
asset B, which has a return of 20%, and the remaining in asset C, which has a return of 30%,
25. what is the portfolio's expected rate of return?
PORTFOLIOS WITH MORE THAN ONE ASSET
ITEMS 26-28
Security X has an expected return of 12% and a standard deviation of 28% per year. Security Z has an expected
return of 19% and a standard deviation of 60% per year. The covariance of the stocks is 1. There is an equal
investment in X and Y.
26. What is the portfolio expected return?
27. Compute for the variance
28. Compute for the standard deviation
ITEMS 29-34
A utility stock and a commodity stock make up the two stocks in Haji's portfolio. She is aware that the utility
stock's return has a standard deviation of 40% and that the commodity stock has a standard deviation of 30%.
However, she does not know the exact covariance in the returns of the two stocks. In order to understand what
the variance of the portfolio would be for a range of covariances, Haji would like to plot the variance of the
portfolio for each of the three situations (covariance of 0.12, 0, and -0.12).
29-31. Compute for the variance using all the three cases of covariances, assuming an equal proportion of
each stock in the portfolio.
32-34. Compute for the standard deviation in each case.
CORRELATION COEFFICIENT
ITEMS 35-36
A two-asset portfolio consists of 50% invested in stock A and 50% invested in stock B. The variance of stock A
and B is 5% and 10%, respectively. Assuming that their covariance is 25%,
35. Compute for the variance of the portfolio.
36. Compute for the correlation coefficient.
CAPITAL ASSET PRICING MODEL (CAPM)
ITEMS 37-38
Menchimench, Inc. wants to determine the required return on a stock portfolio with a beta coefficient of 0.5.
The risk-free rate of 6% and the market return of 12%.
37. Compute the required rate of return.
38. What is the market risk premium?
ITEM 39
The beta of Taylor Company’s shares is 1.6, the risk-free rate is 5% and the required return is 16.2%. Assuming
Selena Company is quoted in the same stock market, and the only difference is that it has a beta of 1.4.
39. What is the market risk premium?
40. Using the CAPM, compute for the required rate of return on Selena Company’s shares.
ITEM 41
Stock M has a beta of 1.4 and an expected return of 15.8%. Stock N has a beta of .10 and an expected return of
12.6%.
41. What is the market premium?
CAPITAL MARKET LINE (CML)
ITEMS 42-44
Suppose the expected return on the tangent portfolio is 20% and its volatility is 60%. The risk-free rate is 4%.
42. What is the required return of an asset with standard deviation of 20% using the CML?
43. What is the standard deviation of an efficient portfolio whose expected return of 14%?
44. What is the standard deviation of an efficient portfolio whose expected return of 12%?
PORTFOLIO BETA
ITEM 45
Raph owns a stock portfolio in which he invested 25% in stock A, 25% in stock B, 35% in stock C, and 15% in
stock D. The betas for these stocks are 0.75, 1.80, 1.48, and 1.20, respectively.
45. What is the portfolio beta?
CAPM – OVERPRICED, UNDERPRICED, OR CORRECTLY PRICED
ITEMS 46-50
Yohan manages investments. He must do an annual evaluation as part of his duties for the recommendations
provided to him regarding the portfolios being taken into consideration for next year. 4% is the risk-free rate.
The portfolios whose predicted returns, betas, and standard deviations are listed below:
PORTFOLIO
EXPECTED RETURN
1
2
3
4
5
Market Portfolio
13%
23%
18%
7%
13%
12%
Using the Capital Asset Pricing Model (CAPM),
46.
47.
48.
49.
50.
Is Portfolio 1 correctly priced?
Is Portfolio 2 correctly priced?
Is Portfolio 3 correctly priced?
Is Portfolio 4 correctly priced?
Is Portfolio 5 correctly priced?
BETA
1.3
2.3
1.6
0.6
1.2
1.0
STANDARD DEVIATION
8.8%
12.2%
10.5%
10%
6.5%
5.0%