Estimating Risk and Return - kelvin777 - 78480

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  • From: Business, Finance
  • Due on: Fri 11 Mar, 2016 (06:00pm)
  • Asked on: Wed 09 Mar, 2016
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  • Question 1:
    • Proficient-level: "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return?" (Cornett, Adair, & Nofsinger, 2016, p. 258).
    • Distinguished-level: Explain the role of probability distribution in determining expected return.
  • Question 2:
    • Proficient-level: "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired" (Cornett, Adair, & Nofsinger, 2016. p. 258).
    • Distinguished-level: Provide examples of a portfolio for someone who is very risk averse and for someone who is less risk averse.
  • Question 3:
    • Proficient-level: Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns" (Cornett, Adair, & Nofsinger, 2016, p. 259).
    • Distinguished-level: Recalculate the expected return under a set of changed economic probabilities.
  • Question 4:
    • Proficient-level: "If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?" (Cornett, Adair, & Nofsinger, 2016, p. 259).
    • Distinguished-level: Identify which financial security's return is typically considered the risk-free rate.
  • Question 5:
    • Proficient-level: "The average annual return on the Standard and Poor's 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years?" (Cornett, Adair, & Nofsinger, 2016, p. 259).
    • Distinguished-level: Define, in your own words, the term, market risk premium.
  • Question 6:
    • Proficient-level: "Hastings Entertainment has a beta of 0.65. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings' required return?" (Cornett, Adair, & Nofsinger, 2016, p. 259).
      • Use the capital asset pricing model to calculate Hastings' required return.
    • Distinguished-level: Recalculate the required return with a change to beta, and explain the effect of a 1.0 increase in beta on the subsequent amount of change in the required return.
  • Question 7:
    • Proficient-level: Calculate the beta of your portfolio, which comprises the following items: (a) Olympic Steel stock, which has a beta of 2.2 and comprises 40 percent of your portfolio, (b) Rent-a-Center stock, which has a beta of 1.5 and comprises 28 percent of your portfolio, and (c) Lincoln Electric stock, which has a beta of 0.5 and comprises 32 percent of your portfolio (Cornett, Adair, & Nofsinger, 2016).
    • Distinguished-level: Determine whether the portfolio has less risk, equal risk, or more risk compared to the overall market.
Economic State Probability Return
Fast Growth 0.30 40%
Slow Growth 0.40 10%
Recession 0.30 −25%
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Estimate Risk and Return
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