Purchase Solution

Estimating Risk and Return Assessment

Not what you're looking for?

Ask Custom Question

1. Explain how differences in allocations between the risk-free security and the market portfolio can determine the level of market risk.

2. Based on the probability and percentage of return for the three economic states in the table below, compute the expected return.

Economic State Probability Percentage of Return
Fast Growth 0.10 60
Slow Growth 0.50 30
Recession 0.40 -23

3. If the risk-free rate is 7 percent and the risk premium is 4 percent, what is the required return?
4. Suppose that the average annual return on the Standard and Poor's 500 Index from 1969 to 2005 was 14.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years?
5. Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Hastings' required return? Use the capital asset pricing model (CAPM) to calculate Conglomco's required return.
6. Calculate the beta of a portfolio that includes the following stocks:
- Conglomco stock, which has a beta of 3.9 and comprises 35 percent of the portfolio.
- Supercorp stock, which has a beta of 1.7 and comprises 25 percent of the portfolio.
- Megaorg stock, which has a beta of 0.3 and comprises 40 percent of the portfolio.

Purchase this Solution

Solution Summary

This solution answers various questions involving risk and return assessment in 372 words. Formulas and step-by-step computations are shown.

Solution Preview

1) A risk-free security has zero risk, i.e. Beta = 0. A market portfolio has market risk, i.e. Beta = 1. By observing the differences in the allocations between the risk-free security and market portfolio, the level of market risk can be determined. For example, if 25% of the market is invested in risk-free securities, while 75% of the portfolio is invested in the market, then the portfolio will have Beta = 75%.

2) Expected return = (probability of Fast Growth * % Return of Fast ...

Solution provided by:
Education
  • MSc, California State Polytechnic University, Pomona
  • MBA, University of California, Riverside
  • BSc, California State Polytechnic University, Pomona
  • BSc, California State Polytechnic University, Pomona
Recent Feedback
  • "Excellent work. Well explained."
  • "Can you kindly take a look at 647530 and 647531. Thanks"
  • "Thank you so very much. This is very well done and presented. I certainly appreciate your hard work. I am a novice at statistics and it is nice to know there are those out there who really do understand. Thanks again for an excellent posting. SPJ"
  • "GREAT JOB!!!"
  • "Hello, thank you for your answer for my probability question. However, I think you interpreted the second and third question differently than was meant, as the assumption still stands that a person still independently ranks the n options first. The probability I am after is the probability that this independently determined ranking then is equal to one of the p fixed rankings. Similarly for the third question, where the x people choose their ranking independently, and then I want the probability that for x people this is equal to one particular ranking. I was wondering if you could help me with this. "
Purchase this Solution


Free BrainMass Quizzes
Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.