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Assignment 2

This document contains 4 questions regarding stock and portfolio analysis. Question 1 involves calculating return, standard deviation, and coefficient of variation for two stocks. Question 2 involves using the Capital Asset Pricing Model to calculate expected returns for different stocks. Question 3 provides a scenario analysis to calculate expected returns and standard deviations for stocks and bonds. Question 4 uses the scenario analysis to calculate returns and standard deviation for a portfolio with 70% stocks and 30% bonds.

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523 views2 pages

Assignment 2

This document contains 4 questions regarding stock and portfolio analysis. Question 1 involves calculating return, standard deviation, and coefficient of variation for two stocks. Question 2 involves using the Capital Asset Pricing Model to calculate expected returns for different stocks. Question 3 provides a scenario analysis to calculate expected returns and standard deviations for stocks and bonds. Question 4 uses the scenario analysis to calculate returns and standard deviation for a portfolio with 70% stocks and 30% bonds.

Uploaded by

fiza akhter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ASSIGNMENT 2

Q No. 1 Two stock prices for six days are given below.

Price A Price B
25 55
29 60
33 61
29 63
26 61
29 60

Calculate:

1. Average return of both stock


2. Standard deviation of each stock
3. Coefficient of Variation of each stock
4. Which stock is less risky based on Standard deviation?
5. Which stock you will select based on Coefficient of variation?

Q2.
a) A share of stock with a beta of .80 now sells for $45. Investors expect the stock to pay
a year-end dividend of $1.80. The T-bill rate is 4.5 percent, and the market risk
premium is 7 percent. If the stock is perceived to be fairly priced today, what must be
investors’ expectations of the price of the stock at the end of the year?

b) The following table shows betas for several companies. Calculate each stock’s
expected rate of return using CAPM. Assume the risk free rate of interest is 9 percent.
Use a 6 Percent risk premium for the market portfolio.

Company Beta
Cisco 2.03
CitiGroup 1.63
Merck 0.50
Walt Disney 0.74

c) If the expected rate of return on the market portfolio is 14 percent and T- bills yield is
6 percent, what must be the beta of a stock that investors expect to return 10 percent?
d) You have equal investment in all four stocks given in part (b) of this question. What
would be your portfolio beta?
e) Student practice: Suppose you have investment as follows:

Cisco 20%
CitiGroup 20%
Merck 30%
Walt Disney 30%

Calculate your portfolio beta.

Q3. Consider the following scenario analysis:

Scenario Probability Stocks Bonds

Recession 0.30 -6 % +15%


Normal Economy 0.30 +14 +7
Boom 0.40 +26 +5

a) Calculate the expected rate of return and standard deviation for each investment?
b) Which investment would you prefer?

Q4. Use the data in the previous problem and consider a portfolio with weights of 0.70
in stocks and 0.30 in bonds.

a) What is the rate of return on the portfolio in each scenario?


b) What is the expected rate of return and standard deviation of the portfolio?
c) Would you prefer to invest in the portfolio, in stocks only, or in bonds only?

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