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BUA321 Chapter 8 Class notes

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BUA321 Chapter 8 Class notes

- 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”?

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

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

- What does history tell us about stock returns?
- How would you describe Risk?

- 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.

- 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.

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

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

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

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

- 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.

- 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

- http://youtu.be/SXLkP4_gX1Y

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

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

b) 60% X, 40% Y

c)35% Y, 65% Z

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)

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

- 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

- 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.