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Risk investment

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1. Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):

Stock Rit Rmt
B 11.5% 4.0%
F 10.0 8.5
T 14.0 9.6
C 12.0 15.3
E 15.9 12.4
Rit = return for stock i during period t
Rmt = return for the aggregate market during period

2. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following systematic risk measures (betas):

Stock βi
B 0.95
F 1.25
T 1.45
C 0.70
E −0.30

3. Considering the world economic outlook for the coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range between −20 percent and +40 percent with the following probabilities:

Probability Possible Returns
0.10 −0.20
0.15 −0.05
0.20 0.10
0.25 0.15
0.20 0.20
0.10 0.40
Compute the expected rate of return E(Ri) for Lauren Labs.

4. Given the following market values of stocks in your portfolio and their expected rates of return, what is the expected rate of return for your common stock portfolio?

Stock Market Value ($Mil.) E(Ri)
Disney $15,000 0.14
Starbucks 17,000 −0.04
Harley Davidson 32,000 0.18
Intel 23,000 0.16
Walgreens 7,000 0.12

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Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):
S tock R it R m t
B 11.5% 4.0% Abnormal return = Actual return - normal return = 11.5% - 4.0% = 6.5%
F 10.0 8.5 Abnormal return = Actual return - normal return = 10.0% - 8.5% = 1.5%
T 14.0 9.6 Abnormal return = Actual return - normal return = 14.0% - 9.6% = 4.4%
C 12.0 15.3 Abnormal return = Actual return - normal return = 12.0% - 15.3% = - 3.3%
E 15.9 12.4 Abnormal return = Actual return - normal return = 15.9% - 12.4% = 3.5%
R it = return for stock i during period t
Rmt = return for the aggregate market during period
2
Compute the abnormal ...

Solution Summary

The expert computes the abnormal rates of return for the stocks during period. The economic outlooks for the coming year and estimates of sales are determined.

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How individual investors make investment decisions in practice rather than in theory; and
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In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.

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