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Financial Decisions: Stocks, Standard Deviation, Beta and Others

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1. If the historical standard deviation of common stocks has been 20.3% and small company stocks 34.6%, explain how the S & P Composite Index could have a standard deviation of 20.3%?

2. Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate.

3. Discuss the importance of beta as a risk measure for a single security.

4. A portfolio is entirely invested into Bruno's Gold Mining Equity, which is expected to return 18%, and Alfred's Inc. bonds, which are expected to return 6%. Three quarters of the funds are invested in Bruno's and the rest in Alfred's. What is the expected return on the portfolio?

5. An individual in her mid-thirties is considering an investment strategy regarding her personal pension fund. She expects to retire at age 60. Name five general types of investments. Which of these should this individual consider? Give a rationale for your answer.

6. A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. Find the portfolio beta.

7. An investor's recent earnings on Stock A were:
Current year 8%
Last year 7%
Two years ago 15%
Calculate the three-year holding period and the average three-year return.

8. An investor bought 100 shares of stock at $20 each. At the end of the year, the investor received a total of $400 in dividends, and the stock was worth $2,500. What was the total dollar capital gain and total dollar return?

9. Little John Industries sold for $1.90 on January 1st and ended the year at $2.50. In addition, the stock paid dividends of $0.20 per share. Calculate Little John's dividend yield, capital gain yield, and total rate of return for the year.

10. Calculate the expected return on the stock of Mitro Corporation. The beta is estimated to be 1.4, the market risk premium is 9% and the risk-free rate is 4%.

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Solution Summary

This solution shows step-by-step calculations to determine values for financial decisions on stocks, assets, earnings, risk measure and returns on stocks.

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