Bua321 chapter 8 class notes
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BUA321 Chapter 8 Class notes. Risk and Return. If you are thinking of investing in a stock, what things would you investigate? What is inside trading? What does this mean: “There is no such thing as a free lunch”?. Stock Fraud. Bernie Madoff

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BUA321 Chapter 8 Class notes

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Bua321 chapter 8 class notes

BUA321 Chapter 8 Class notes


Risk and return

Risk and Return

  • If you are thinking of investing in a stock, what things would you investigate?

  • What is inside trading?

  • What does this mean: “There is no such thing as a free lunch”?


Stock fraud

Stock Fraud

  • Bernie Madoff

    http://www.youtube.com/watch?feature=player_detailpage&v=s68FR1MXT8Q


Bua321 chapter 8 class notes

HPR

  • Calculate the holding period return for TAP. Dividends totaled $3.90.


Returns

Returns

  • What does history tell us about stock returns?

  • How would you describe Risk?


Return distribution

Return distribution

  • If you purchased a stock for $27 last year and this year it is worth $45. What was the return?

  • Calculate the statistics for this asset. 


Return distribution1

Return distribution

  • If you purchased a stock for $37 last year and this year it is worth $45. What was the return?

  • Calculate the statistics for this asset. 


Risk example

Risk Example

  • Combine your prices with 2 other people. Create 3 portfolios. Complete the following table. 


Efficient frontier

Efficient Frontier

  • Combine 2 assets into a portfolio. Insert the picture of the efficient frontier of the portfolio.


What can you say about the information in the following table

What can you say about the information in the following table:


Terminology

 Terminology

  • What is meant by “Do Not Put All Your Eggs in One Basket”


Calculate the return on the following portfolio

 Calculate the return on the following portfolio:


Portfolio

Portfolio

  • What does correlation describe?

  • What does CAPM describe?

  • What things create diversifiable risk? Non-diversifiable risk?

  • What is beta?


Portfolio beta

Portfolio Beta


Capm and sml

CAPM and SML

  • Use the beta of the above portfolio to calculate the expected return of a portfolio. Use the 30 year Treasury yield for the risk free rate and 12% for the average return of the market.


Group activity

Group activity

  • Complete the following exercise

    • Find the expected returns for your individual asset using this spreadsheet

      • Use the same market and RF returns

    • You are given $100,000 to invest in your groups stocks

    • Find the betas for you company and input into the portfolio beta and return worksheet

    • Decide how much to invest in each asset

    • Calculate the expected returns for this portfolio


Numbers investors should know

 Numbers investors should know.

  • http://youtu.be/SXLkP4_gX1Y


Bua321 chapter 08 web 80 points

 BUA321 Chapter 08 Web 80 points

1) calculate the statistics for the following investments:

eventPrrxryrz

very good.3012-88

good.20 8- 38

Avg.25 2 68

Bad.15 -5 108

Very Bad.10 -10 198


2 for the above assets create the portfolios below

2) For the above assets, create the portfolios below

a) 40% X, 35% Y, 25% Z

b) 60% X, 40% Y

c)35% Y, 65% Z


3 calculate the portfolio statistics for the following assets

 3) Calculate the portfolio statistics for the following assets:

weightreturnvariance beta

XYZ.351271.23

DEF.25 9121.98

HIJ.40 15202.98

 correlation

XYZDEFHIJ

XYZ1.0-.25.75

DEF1.0.45

HIJ1.0

Portfolio A(.35, .25, .40)

Portfolio B(.45, .25, .30)

Portfolio C (.10, .75, .15)


Bua321 chapter 8 class notes

SML

4) If the risk free rate of return is 3.75% and the stock market averages 12%,

What is the expected return on the portfolios using the SML?

A

B

C


5 go to yahoo finance

5) Go to Yahoo Finance

  • find your company.

  • Go to historical prices and download the past 5 years of prices and dividends. (Hint select monthly prices, download, then select dividends only)

  • a) delete all prices except the first month and the last month.

  • b) add all the dividends.

  • c) calculate the holding period return for your stock

  • d) combine this return with the returns of two other classmates and insert in the table below.


E determine the growth and probabilities you expect in the upcoming economic conditions

e) Determine the growth and probabilities you expect in the upcoming economic conditions.


F determine the expected returns one year from today using the above information

f) Determine the expected returns one year from today using the above information


G create a portfolio using stocks and calculate the returns

g) create a portfolio using stocks and calculate the returns:

1) 1 & 2

2) 2 & 3

3) 1 & 3


H copy and paste the efficient frontiers from the worksheet

 h) copy and paste the efficient frontiers from the worksheet


Bua321 chapter 8 class notes

 SML

  • What are the betas of the company stocks?

  • Create a portfolio using the three stocks and calculate the portfolio beta.


Bua321 chapter 8 class notes

  • j) Use the beta above and the 30 year risk free rate and stock market average return of 12% the determine the expected return of the portfolio return.


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