Chapter 8_Solutions_14thEdition.doc - Chapter8...

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Chapter 8Analysis of Risk and ReturnCHAPTER 8ANALYSIS OF RISK AND RETURNSOLUTIONS TO PROBLEMS:1.a. E(RX) = .1(-10%) + .2(10%) + .4(15%) + .2(20%) + .1(40%)=15%E(RY) = .2(2%) + .2(7%) + .3(12%) + .2(15%) + .1(16%)=10%b.X= [(-10-15)2.1 + (10-15)2.2 + (15-15)2.4 + (20-15)2.2 +(40-15)2.1].5=11.62%Y= [(2-10)2.2 + (7-10)2.2 + (12-10)2.3 + (15-10)2.2 +(16-10)2.1].5=4.94%c. Stock X is riskier because it has a higher standard deviation ofreturns than Y.The coefficient of variation of returns is also higher for X(0.77) than for Y (0.49).2.z = (33% - 22%)/11% = +1.0From Table V, the probability of returns in excess of one standarddeviation above the mean is15.87%.z = (0% - 22%)/11% = -2.0From Table V, the probability of returns less than two standarddeviations below the mean is2.28%.3.a.The coefficient of variation of returns for Cornhusker's stock is 0.75(15%/20%).The coefficient of variation of returns for Mustang's stockis 0.90 (9%/10%).Therefore, according to the coefficient of variation8-1Internal
Chapter 8Analysis of Risk and Returncriterion (which considers total risk -- both systematic andunsystematic),Mustang's stock is riskier.b.Looking only at systematic risk (i.e., assuming that investors arewell-diversified),Cornhusker appears to be riskier.4.Treasury bills:= 0.0;  kj = rf = 0.06 General Electric:  = 1.3;  kj = 0.06 + 1.3(0.088) = 0.174 or 17.44%Portfolio:  = 0.667(0.0) + 0.333(1.3) = 0.43                          E(R) = 0.667(0.06) + 0.333(0.1744) = 0.0981 or 9.81%    5.a. (i) E(R) = .4(.10) + .6(.07) =.082 or 8.2%(ii)p= [(.4)2(.08)2+ (.6)2(.04)2+ 2(.4)(.6)(.5)(.08)(.04)].5=.0487or 4.87%b. (i) E(R) = .7(.10) + .3(.07) =.091 or 9.1%(ii)p= [(.7)2(.08)2+ (.3)2(.04)2+ 2(.7)(.3)(.5)(.08)(.04)].5=.0629 or 6.29%c. Expected returns remain the same.They do not depend on the

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Term
Spring
Professor
Nathan
Tags
Standard Deviation, Interest, Risk in finance

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