Risk and Return & CAPM
1. Using the data in the table below, calculate the return for investing in XYZ shares from 2 January
2009 to 2 January 2010. Assume that dividends are reinvested in the same shares.
Date
2 Jan 2009
5 Feb 2009
14 May 2009
13 Aug 2009
12 Nov 2009
2 Jan 2010
Price
33.88
30.67
29.49
32.38
39.07
41.99
Dividend
0.17
0.17
0.17
0.17
2. The last four years of returns for a share are as follows:
1
-4%
2
28%
3
12%
4
4%
a. What is the average annual return?
b. What is the variance of the share’s returns?
c. What is the standard deviation of the share’s returns?
3. You are considering how to invest part of your retirement savings. You have decided to put
$200,000 in to three shares: 50% in GoldFinger (currently $25/share), 25% in Moosehead
(currently $80/share) and the remainder in Venture Associates (currently $2/share). If
GoldFinger shares go up to $30/share, Moosehead shares drop to $60/share and Venture
Associates shares rise to $3/share,
a. What is the new value of the portfolio?
b. What return did the portfolio earn?
c. If you don’t buy or sell shares after the price change, what are your new portfolio
weights?
4. Suppose New Corporation shares have a beta of 1.6, whereas Rio Tinto shares have a beta of 1.
If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%,
according to the CAPM,
a. What is the expected return of New Corp shares?
b. What is the expected return of Rio shares?
c. What is the beta of a portfolio that consist of 60% News Corp shares and 40% Rio
shares?
d. What is the expected return of a portfolio that consists of 60% News Corp shares and
40% Rio shares? (Show both ways to solve this)