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T10 risk and return v2 - Tutorial and exercises for better
understanding
Finanxial Management (INTI International University)
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MODULE
: FINANCIAL MANAGEMENT (FIN3212)
CAMPUS
: IICKL
TOPIC
: RISK & RETURN (VERSION 2)
Question 1
Beauty Co. has invested in the following stocks:
Stock
Amber
Aigner
Lancome
Lamer
No. of units purchased
900
700
950
800
Beta factor
1.1
0.9
1.5
0.8
$3.50
$4
$3.20
$4.10
Market value per unit
The risk-free rate is 4% and the return on market is 17%. Assuming the required rate of return is
16.5%, assist Beauty Co to calculate:
(a) Portfolio beta factor.
(b) Expected rate of return by using CAPM method for each of the stocks individually.
(c) Portfolio expected rate of return.
Question 2
The return and risk of Security X and Security Y are provided below:
Security
Expected return
Risk
(Standard deviation)
X
4.5%
3.84%
Y
3.5%
2.6%
(a) Calculate the correlation coefficient between Security X and Security Y if the covariance
for both securities is 0.0009.
(b) You have decided to invest equal amount of money for both securities. In that situation,
calculate the risk and the return of this portfolio.
1
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Question 3
Logit Corporation is considering an investment in one of the two portfolios after a turbulent period
in the stock market. Using the information in the table below, calculate the following:
Portfolio A
Portfolio B
Probability Return (%) Probability Return (%)
0.2
-2
0.1
5
0.5
19
0.3
7
0.3
25
0.4
12
0.2
14
(a) Calculate the expected return for both portfolio.
(b) Calculate the standard deviation for both portfolio.
2
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