Advanced Business Finance
Additional Practice Problems
Risk and Return
You are considering an investment in two stocks, Bart, Inc. and Lisa Corp.
There are three
possible states of the world:
recession is expected with a probability of 0.5, modest growth is
expected with a probability of 0.3, and boom is expected with a probability of 0.2.
is expected to earn -20%, 20%, and 25% in each of the three states, respectively.
is expected to earn -10%, -5%, and 40% in each of the three states, respectively.
create an equally weighted portfolio of these two securities, what is the standard deviation of
Calculate the coefficient of variation for each of the securities in the above problem.
could only invest in one, which one would you choose?
Your assistant has been gathering information.
Specifically, she has found the standard
deviation of the market returns is 3.2% and the standard deviation of the stock’s returns is
In addition, she has found the return on 10 year U.S. Treasury bonds is 5% and the
expected market risk premium is 5.5%. If the expected return on the stock is 7.31%, what is
the correlation coefficient between the stock and the market?
4. Three months ago, you purchased 1,000 shares of stock in Keven Corp. for $50 each.
addition, you purchased 10 Yost Corp. bonds with a coupon rate of 8 percent, paid
semiannually, for $985 each, and a piece of art for $12,500.
Since those purchases, the stock