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Question RISK & RETURN

This document provides a tutorial on risk and return concepts with 8 multiple choice questions. It covers topics like calculating standard deviation and expected return for investments with different probability distributions of outcomes. It also discusses comparing investments based on their risk-return ratios using coefficients of variation. The questions assess understanding of key risk and return metrics like expected return, standard deviation, and coefficient of variation in investment decisions.

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Qaisar Basheer
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82 views2 pages

Question RISK & RETURN

This document provides a tutorial on risk and return concepts with 8 multiple choice questions. It covers topics like calculating standard deviation and expected return for investments with different probability distributions of outcomes. It also discusses comparing investments based on their risk-return ratios using coefficients of variation. The questions assess understanding of key risk and return metrics like expected return, standard deviation, and coefficient of variation in investment decisions.

Uploaded by

Qaisar Basheer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TUTORIAL: RISK & RETURN

Question 1
Dee Co. is considering investing in project M. The Question 4
possible returns and probabilities of occurrence are as The probability distributions of expected returns for
follows: stock HR and stock LR are as follows:
State of Probabilities Possible returns Prob Stock HR (%) Stock LR (%)
economy .
Recession 15% 20% 0.10 (15) (25)
Moderate 45% 45% 0.20 0 5
Expansion 40% 70% 0.40 5 17
Required: 0.20 10 30
Calculate the standard deviation of the project. 0.10 25 60
ER: 51.25%, SD: 17.46% Required:
Identify which of the two stocks is more risky?
Question 2 HR – ER: 5.00%, SD: 9.49%, CV: 1.90 (Riskier)
Tim Inc. is evaluating three investment alternatives. The LR – ER: 17.30%, SD: 20.59%, CV: 1.19
information as to the possible cash inflows and the
probabilities of outcomes is as follows: Question 5
P Q R Based on the information given below, which of the
Prob. CFs Prob CFs Prob CFs investments would be considered best based on its risk
$ . $ . $ and return relationship? Assume all investors are risk-
Poor 0.40 650 0.50 400 0.20 350 averse and the investments will be held in isolation, not
Goo 0.60 1,600 0.50 2,000 0.80 3,000 in a portfolio. Explain.
d
Required:   Investment
Rank the investment alternatives in terms of risk.   D E F
P – ER: $1220, SD: $465.40, CV: 0.3815 (Least risky) Expected return, r̂ 10.0% 18.0% 18.0%
Q – ER: $1200, SD: $800, CV: 0.6667 (Riskiest) Standard deviation, σ 7.0% 12.0% 20.0%
R – ER: $2470, SD: $1060, CV: 0.4292 (Moderate) D – CV: 0.7
E – CV: 0.6667
Question 3 F – CV: 1.1111
Advance Co. is considering taking on a project which Choose E because the per unit risk is the lowest as
would maximize the shareholders’ return. The company compare to D and F
is typically a risk-averse firm. The information pertaining
to the projects’ expected returns and standard Question 6
deviation is as follows: Consider the following annual rate of returns of Digi and
Projects Expected returns Standard deviation Celcom:
($) ($)
A 196,500 103,500 Year Digi Celcom
B 505,500 302,250 2002 -16.8% -19.0%
C 66,000 81,000 2003 49.9% 48.0%
D 93,750 155,250 2004 17.6% 4.2%
Required: 2005 -26.0% 16.1%
Based on coefficient of variation, which project do you 2006 23.4% -6.0%
think would be chosen?
A – CV: 0.5267 (Choose) Calculate the expected return and standard deviation of
B – CV: 0.5979 Digi and Celcom. State the stock that appear to be
C – CV: 1.2273 better in terms of expected return and standard
D – CV: 1.656 deviation.
Tutorial Risk & Return
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Digi – ER: 9.6%, SD: 30.96%
Celcom – ER: 8.66%, SD: 25.51%
Digi is better in terms of expected return
Celcom is better in terms of standard deviation
Question 7
What is the coefficient of variation of the following
income statement sales projection given the following
information?
Possible Sales Level (in 000’s) Probability
1000 10%
2000 15%
2500 50%
2800 20%
3000 5%
ER: 2360K SD: 523 CV: 0.2216

Question 8
A stock analyst forecasts that M Ltd and C Ltd. stocks
have the following probabilities of return depending on
the state of market:
Bear Normal Bull
Market Market Market
Probabilit 0.2 0.5 0.3
y
M Ltd -20% 18% 50%
C Ltd. -15% 20% 10%
Required:
Calculate the coefficient of variation for each stock.
M – ER: 20%, SD: 24.33%, CV: 1.216
C – ER: 10%, SD: 13.23%, CV: 1.323

Tutorial Risk & Return


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