25300 Chapter Notes - Chapter 10 & 11: Expected Return, Risk Premium, Current Yield
Tutorial questions 25300 FBF
Tutorial 8 – Risk and Return
1. You purchased 150 shares in ABC Ltd at the beginning of the year at a price of $75.15. During the
year the company paid a dividend of $1.12 per share and the share price closed the year at $67.87.
What was your dollar return on the investment? What is your percentage return?
2. Why is diversification an important concept in finance?
3. Using the following, calculate the average returns and the standard deviations for X and Y. Which
share will perform better next year?
Year
Return on X
Return on Y
1
14%
32%
2
-21%
-5%
3
17%
17%
4
9%
-12%
5
23%
45%
4. Calculate the expected return and standard deviation for a portfolio consisting of 30% in Ant
Ltd and the remainder in Bell Ltd.
State of
economy
Probability
of state
Rate of return
Ant Ltd
Rate of return
Bell Ltd
Recession
15%
2%
-30%
Normal
55%
10%
18%
Boom
???
15%
31%
5. An investor has the following portfolio of four shares. However, the amount invested in SYD is not
supplied. The investor owns 4,000 SYD shares that are currently trading at $2.50 each. Each share
is priced in equilibrium. Government bonds have a current yield of 5% p.a.
Company
Expected return
Amount invested
Beta
SYD
11.63%
???
0.68
JFK
14.75%
$20,000
1.0
BKK
17.09%
$15,000
1.24
LHR
22.55%
$5,000
1.8
(a) What is the expected return of the portfolio?
(b) What is the risk of the portfolio?
(c) Calculate the market risk premium.
(d) The investor is considering the purchase of another share, LAX, that currently provides a
return of 19.25%. If LAX has a beta of 1.4, are LAX shares overpriced, underpriced or fairly
priced? Explain.
(Answers: 1. -$924; -8.20%, 2. See lecture notes, 3. X: 8.4%, 17.2%; Y: 15.4%, 24.09%, 4. 13.38%, 14.94%, 5. (a)
15.608%, (b) 1.088, (c) 9.75%, (d) underpriced)
