Exercises on Risk and Return Attempt them all

1. The following are 20 years data observed in time series pertaining to rate of return on investment reported by XYZ Company, and ABC Company. Rate of Return reported (%) 6% 10 15 20 24 Instruction A. Use the data given above and compute the following for each company a) Mean return b) Standard deviation c) Coefficient of variation B. Which company show more total risk as measured by standard deviation? Frequenc y of observati on AB XY C Z 3 2 3 4 5 6 8 4 1 4

2. Given are the following information: Rf = 4% Rm = 14% A = 2.25 B = 1.5 C = 0.8 A = 8 B = 10 C = 12 RRA [rate of return on asset A] = 25.5% RRB [rate of return on asset B] = 19% RRC [rate of return on asset C] = 10%

Instruction: answer the following questions using CAPM only. a) Which of the three assets [A, B, or C] bear more total risk? Why? b) Which of the three assets [A, B, or C] bear more systematic risk? Why?

c) Setup a portfolio of Asset A and Asset B, with weights of 38% for Asset A and the remaining for Asset B, and compute the RRR on the portfolio. d) Setup a portfolio of Asset C, Asset Rf and Asset B, with weights of 25%, 35% and 40%, respectively and compute the portfolio risk. e) Which of the three assets is/are mispriced, if any? Why?