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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

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

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

• 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.

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?

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

• http://youtu.be/SXLkP4_gX1Y

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

Very Bad .10 -10 19 8

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

b) 60% X, 40% Y

c) 35% Y, 65% Z

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:

• 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 worksheet

• What are the betas of the company stocks?

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