Assignment

Using the All investments involve risk. The return an investor may expect from income and/or capital appreciation might not occur. Understanding risk, the sources of risk, and how to measure it are critical concepts to master.

On pages 173-175 of the text, prepare written answers to Problems 1, 2, 5, and 8.

All Investments Assignment

1. You are considering three stocks with the following expected dividend yields and capital gains:

Dividend Yield

Capital Gain

A

14%

0%

B

8

6

C

0

14

a) What is the expected return on each stock?

b) How may transactions costs and capital gains taxes affect your choices among the three securities?

2. A portfolio consists of assets with the following expected returns:

Expected Return

Weight in Portfolio

Real estate

16%

20%

Low-quality bonds

15

10

AT&T stock

12

30

Savings account

5

40

a) What is the expected return on the portfolio?

b) What will be the expected return if the individual reduces the holdings of the AT&T stock to 15 percent and puts the funds into real estate investments?

 

5. What is the beta of a portfolio consisting of one share of each of the following stocks, given their respective prices and beta coefficients?

Stock

Price

Beta

A

$10

1.4

B

24

0.8

C

41

1.3

D

19

1.8

How would the portfolio beta differ if (a) the investor purchased 200 shares of stocks B and C for every 100 shares of A and D and (b) equal dollar amounts were invested in each stock?

8. Using the material on the standard deviation and the coefficient of variation presented in the appendix to this chapter, rank the following investments with regard to risk.

a) Investment Returns

Stock A

Stock B

2.50%

7.50%

2.75

8.25

3.00

9.00

3.25

9.75

b) Investment Returns

Stock A

Stock B

1.70%

7.40%

1.85

7.70

2.00

8.00

2.15

8.30

2.30

8.60

 

 

 

 

 

References

Mayo, Herbert B. (2013). Investments: An introduction (11th Ed.). South-Western: Cengage Learning.

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