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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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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

slide4
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.
terminology
 Terminology
  • What is meant by “Do Not Put All Your Eggs in One Basket”
portfolio
Portfolio
  • What does correlation describe?
  • What does CAPM describe?
  • What things create diversifiable risk? Non-diversifiable risk?
  • What is 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:

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
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:

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)

slide29
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.
slide35
 SML
  • What are the betas of the company stocks?
  • Create a portfolio using the three stocks and calculate the portfolio beta.
slide36

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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