Purchase Solution

Stock Market Return Risk Ratio

Not what you're looking for?

Ask Custom Question

If you have a certain amount of money invested in the stock market for a moment of time, then there is an expected return on that investment (the stock market goes up on average), and a risk, a variance in that return (the stock market flucuates), both of which are proportional to the amount you have invested. As those moments of time are strung together, the expected returns for the different moments add, while the risks (since they are independent from one moment to the next) combine as square root of sum of squares. You have $10,000 to invest over one year. How should you allocate your investment over time to maximize your return/risk ratio?

Purchase this Solution
Solution Summary

How should you allocate your investment over time to maximize your return/risk ratio is determined.

Solution Preview

Let there be n units of time.
For each unit of time let the expected return be E(r), (note that it is given in the problem that the returns can go up or down, but the expected return is positive, thus we deal with only expected returns).
Now, let us sum up the expected returns over n units of time, which is
n E(r). ...(1)
(As it is given in the problem that the expected returns for different moments add).

Now, we deal with the risk part.
The risk is the variance in the returns. Let us call it ...

Purchase this Solution
Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Risk aversion, reward-to-risk ratio and debt financing

    Risk free rate does not change. Therefore, required return decreases as market risk premium decreases. 43. While Stock X has a reward-to-risk ratio of 6.5, Stock Y has a reward-to-risk ratio of 8.2.

  • Understanding Theoretical Stock Prices

    of return we have assumed a market risk premium (which is the difference between the market required rate of return and the risk free rate of return) of 9.00%, such an assumption is not accurate since the market risk premium changes on daily basis, and

  • Treynor Ratio or Sharpes Ratio

    Coefficient of correlation between market return and stock portfolio 0.70% Market rate of return 6.80% Portfolio return 7.77% Portfolio beta 1.17625 Risk free rate of return 1.30% Therefore, Treynor Ratio for portfolio 0.055035461 Coefficient

  • Finance Beta

    Please calculate the beta and dividend payout ratio of a company with a stock price of $87.00, a dividend payment of $7.10 every year, increasing for the last 10 years, at a growth rate of 6%, while the current market rate of return stands at 13.19%,

  • Discussing the Business Nature of Companies: Mattel, Clorox, and MGM Resorts

    Page=FinancialCondition&symbol=MAT Beta: 0.99 - Beta is a measure of systematic risk or market risk. Based on the beta of this particular stock which is almost 1, we can conclude that this stock moves with the market.

  • Mattel, Clorox, MGM Resorts

    Beta is a measure of systematic risk or market risk. Based on the beta of this particular stock which is almost 1, we can conclude that this stock moves with the market. ? Debt/Equity Ratio = 0.48, the industry ratio = 0.66 ?

  • Determining Risk, Return and Stock Valuation

    465005 Determining Risk, Return and Stock Valuation Given that you know the risk as well as the expected return for two stocks, discuss what process you might utilize to determine which of the two stocks is a better buy.

  • What does the Beta of a Stock Mean?

    Market rate- Risk-free rate)) Expected return on a stock = .05 +(2*(.15-.05)) Expected return on a stock = .05 +.20 Expected return on a stock = .25 The ratio of the expected return on a stock with a beta of 2 to that of a stock with a beta of 1

  • Estimating the intrinsic value of the given stock

    460292 Find the intrinsic value of the stock Find the intrinsic value of the stock of company ABC using the following data: risk free rate = 5% market risk premium = 8% Expected market return = risk free rate + market risk premium beta = 0.9 ROE

View More Related Solutions