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# BUA321 Chapter 8 Class notes PowerPoint PPT Presentation

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

### 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

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

### HPR

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

### Returns

• What does history tell us about stock returns?

• How would you describe Risk?

### 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 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

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

### Efficient Frontier

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

### Terminology

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

### Portfolio

• What does correlation describe?

• What does CAPM describe?

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

• What is beta?

### 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

• 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.

• http://youtu.be/SXLkP4_gX1Y

### 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

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:

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)

### 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

• 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.

1) 1 & 2

2) 2 & 3

3) 1 & 3

### SML

• What are the betas of the company stocks?

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

• 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.