CHAPTER 5
PORTFOLIO RISK AND RETURN: PART I
Presenter
Venue
Date
RETURN ON FINANCIAL ASSETS
Total Return
Periodic
Income
Capital Gain
or Loss
HOLDING PERIOD RETURN
A holding period return is the retur
Chapters 10 and
11 Capital
Budgeting
Two Topics in One
There are two main issues to address on the topic of capital
budgeting.
ONE: HOW TO ESTIMATE CASH FLOWS (CHAPTER 11)
TWO: THE DECISION RULES TO D
Risk and Return Practice Problems
1.
You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your
holding period return?
($1 + $29 - $20
Project
A
B
NPV A
NPV B
Notice that both project NPVs a
How to use data tables
NPV A
$12.04
=> Let the discount rate vary from
1% to 29% in 2% increments
this is the reference column
=> Notice that so
Example: risk and return of portfolios
Assume that as a U.S. investor, you decide to hold a portfolio with 80 percent invested in
the S&P 500 U.S. stock index and the remaining 20 percent in the MSCI
Learning Objectives
1. Define a probability distribution, the mean,
the variance, the standard deviation, and the
volatility.
2. Compute the realized or total return for an
investment.
3. Using the em
some excel practice
pv
1 interest rate
2 yield to maturity
years
240
400
3 PV of annuity
4 FV of annuity
5 number of periods
payment
future value
297
1000
4
60
0
20
10
20
100
100
0
100
1000000
0
6 npv
Valuing Stocks
Learning Objectives
1. Calculate the total return of a stock, given the dividend
payment, the current price, and the previous price.
2. Use the dividend-discount model to compute the va
Wolverine
Wolverine is considering a project. It will require an initi
and an investment in NWC of $2M in year 0. In year 1, d
and demand will grow at 10% per year. The price per un
and this will grow
Chapter 9 Week 6 In Class Worksheet
Formulas
PROBLEMS
1. Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in
one year, and its expected price right after p
Week 6 quiz problem 5. Who Dat Restaurant is considering the purchase of a $10,000 souffl maker. The souffl
maker has an economic life of five years and will be fully depreciated by the straight-line
Year
0
1
2
3
$
irr
AZM
Mini-SUV
-470,000
324,000
188,000
154,000
$
AZF
Full-SUV
-820,000
354,000
428,000
294,000
23.071%
15.359%
take mini suv project
take both
@10%
95,619.835
76,423.742
take mini su
Risk and Return Practice Problems
1. You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your
holding period return?
2.
2. An invest