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BUA321 Chapter 8 Class notesPowerPoint Presentation

BUA321 Chapter 8 Class notes

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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 table:

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

Portfolio table:

- What does correlation describe?
- What does CAPM describe?
- What things create diversifiable risk? Non-diversifiable risk?
- What is beta?

Portfolio Beta table:

CAPM and SML table:

- 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 table:

- 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

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

Numbers investors should know. table:

- http://youtu.be/SXLkP4_gX1Y

BUA321 Chapter 08 Web 80 points table:

1) calculate the statistics for the following investments:

event Prrxryrz

very good .30 12 -8 8

good .20 8 - 3 8

Avg .25 2 6 8

Bad .15 -5 10 8

Very Bad .10 -10 19 8

2) For the above assets, create the portfolios below table:

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:

weight return variance beta

XYZ .35 12 7 1.23

DEF .25 9 12 1.98

HIJ .40 15 20 2.98

correlation

XYZ DEF HIJ

XYZ 1.0 -.25 .75

DEF 1.0 .45

HIJ 1.0

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

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

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

SML assets:

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 assets:

- 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.

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

SML worksheet

- 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.

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