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 return from
holding an asset for a single specified period o
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 DECIDE TO TAKE A PROJECT
(CHAPTER 10)
ONE: HOW TO ESTIMA
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)/$20 = 0.5000, or 50%.
2. An investor purchased a bond
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 somehwere between
21 and 23%, the NPV becomes negative
fo
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 Emerging Markets
index. The expected return is 9.93 per
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 empirical distribution of realized
returns, estimate expe
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
-10000 year 0
5000 year1
5000 year 2
5000 year 3
5000
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 value of a
dividend-paying companys stock, whether the di
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 at 5% per year. Variable costs per unit
in year 2, and
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 paying that dividend is $33.
a. Rearden's expected divid
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 method. The machine will
produce 2,000 souffls per year
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 suv project
take both
profitability index
@10%
1.20344645
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 investor purchased a bond 45 days ago for $985. He received $