Measurement of Risk and Return in Investing

*Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit, no hard keys.

Problem 6-1: Standard Deviation

Given the following probabilities and returns, for MKS,   Inc., find the standard deviation.

DATA

Probability

Return

0.40

7%

0.25

4%

0.15

18%

0.20

10%

Problem 6- 2   Holding-Period Period Return

From the price data below, compute   the holding-period returns for periods 2 through 4.

DATA

TIME

STOCK PRICE (SAR)

1

10

2

13

3

11

4

15

Problem 6-3: Holding-Period Gain SAR and Return

Suppose you purchased 16 shares of DCI stock for 24.22 SAR per share on May 1, 2016. On September 1 of the same year, you sold 12 shares of the stock for 25.68 SAR per share. Calculate the holding-period dollar gain for the shares you sold, assuming no dividend was distributed, and calculate the holding-period rate of return.

Problem 6-4: Capital Asset Pricing Model

Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 5 percent and the expected return for the market is 12 percent.

StockBeta

A.75

B.90

C1.40

Problem 6-5: Security   Market Line

A. Determine the expected return and beta for the   following portfolio:

DATA

Stock

% of Portfolio

Beta

Expected Return

1

40%

1.00

12%

2

25%

0.75

11%

3

35%

1.30

15%

Problem 6-6: Required Rate of Return using CAPM

a. Compute an appropriate rate of return for ABC common stock, which has a beta of 1.2. The risk-free rate is 2 percent, and the market portfolio has an expected return of 11 percent.

b. Why is the rate you computed an appropriate rate?

Problem 6-7: Expected Return, Standard Deviation

Below are the historical prices for Citigroup and the S&P500 Index. Calculate the average monthly returns and the standard deviation for each.

DATA

Month

S&P 500

Stock Prices

Index

May-14

47.57

1924

June-14

47.10

1960

July-14

48.91

1931

August-14

51.65

2003

September-14

51.82

1972

October-14

53.53

2018

November-14

53.97

2068

December-14

54.11

2059

January-15

46.95

1995

February-15

52.42

2105

March-15

51.52

2068

April-15

53.32

2086

May-15

54.97

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Module 6 Critical Thinking Assignment: Measurement of Risk and Return in Investing *Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit, no hard keys. Problem 6-1: Standard Deviation Given the following probabilities and returns, for MKS, Inc., find the standard deviation. DATA Probability 0.40 0.25 0.15 0.20 Return 7% 4% 18% 10% Problem 6- 2 Holding-Period Period Return From the price data below, compute the holding-period returns for periods 2 through 4. DATA TIME 1 2 3 4 STOCK PRICE (SAR) 10 13 11 15 Problem 6-3: Holding-Period Gain SAR and Return Suppose you purchased 16 shares of DCI stock for 24.22 SAR per share on May 1, 2016. On September 1 of the same year, you sold 12 shares of the stock for 25.68 SAR per share. Calculate the holding-period dollar gain for the shares you sold, assuming n

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