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Unit 5 – Characterizing and Estimating Risk and Return

Unit 5 – Characterizing and Estimating Risk and Return

Solve the following using The Rule of 72.

1. You expect to earn 8% per year on your investment. If you invest $3000 today, how much will your investment be worth in 9 years?

2. You want to have $40,000 available to finance a trip around the world in 12 years. You estimate that you can earn 12% on your investment. How much do you need to deposit today to meet your goal?

3. A new Grady White fishing boat cost $5000 in 1979. Today, the very same boat costs around $40,000. Estimate the average annual inflation rate, using the Rule of 72.

4. You invest $2000 today and expect to earn 9% per year. How many years will it take for your investment to grow to $32,000?

Chapter 9 Problems:

9-1 Investment Return. 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? (LG9-1)

9-2 Investment Return. Sprint Nextel Corp. stock ended the previous year at $23.36 per share. It paid a $2.37 per share dividend last year. It ended last year at $18.89. If you owned 500 shares of Sprint, what was your dollar return and percent return? (LG9-1)

9-7 Risk versus Return.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. (LG9-4)

9-8 Risk versus return.Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 13 percent and standard deviation of 29 percent. The average return and standard deviation of WholeMart are 11 percent and 25 percent; and of fruit fly are 16 percent and 40 percent. (LG9-4)

9-15 Average return.The past five monthly returns for Kohls are 3.54 percent, 3.62 percent,

-1.68 percent, 9.25 percent, and -2.56 percent. What is the average monthly return? (LG9-1)

9-16 Average Return. The past five monthly returns for PG&E are -3.17 percent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return? (LG9-1)

9-23 Portfolio Weights.If you own 300 shares of Alaska Air at $42.88, 350 shares of Best Buy at $51.32 shares of Liz Claiborne at $44.73, what are the portfolio weights of each Stock?

(LG9-7)

9-24 Portfolio Weights.If you own 400 shares of Xerox at $17.34, 500 shares of Qwest at $8.15, and 350 shares of Liz Claiborne at $44.73, what are the portfolio weights of each stock?(LG9-7)

Chapter 10 Problems:

10.1 Expected Return.Computed the expected return given these three economic states, their likelihoods, and the potential returns: (LG10-1)

Economic State Probability Return

Fast growth 0.2 40%

Slow growth 0.4 10

Recession 0.4 -25

10-2 Expected Return.Compute the expected return given these three economic states, their likelihoods, and the potential return; (LG10-1)

Economic State Probability Return

Fast growth 0.2 35%

Slow growth 0.6 10

Recession 0.2 -30

10-7 CAPM Required Return.Hastings Entertainments 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 Hasting’s required return? (LG10-3)

10.8 CAMP Required Return.Nanometrics Inc. has a beta of 3.15. If the market return is expected to be 10 percent and the risk-free rate is 3.5 percent, what is Nanometrics’ required return? (LG10-3)

10-11 Portfolio Beta.You have a portfolio with a beta of 1.35. What will be the new portfolio beta if you keep 95 percent of you money in the old portfolio and 5 percent in a stock with a beta of 0.78? (LG10-3)

10-15 Required Return.Paccar’s current stock price is $73.10 and it is likely to pay a $2.69 dividend next year. Since analysts estimate Paccar will have an 11.2 percent growth rate, what is its required return? (LG10-7)

10-17 Expected Return Riskfor the same economic state probability distribution in problem 10-1, determine the standard deviation of the expected return. (LG10-1)

Economic state Probability Return

Fast growth 0.2 40%

Slow growth 0.4 10

Recession 0.4 -25

10-18 Expected Return Risk.For the same economic state probability distribution in problem 10-2, determine the standard deviation of the expected return. (LG10-1)

Economic State Probability Return

Fast growth 0.2 35%

Slow growth 0.6 10

Recession 0.2 -30