Risk and Return

1. The expected annual returns are 15% for investment 1 and 12%for investment 2. The standard
deviation of the first investment return is 10%; the second investment return has a standard
deviation of 5%. Which investment is less risky based on coefficient of Variation?
2. Using the basic CAPM formula, find the answer for following questions. a) Find required return,
when beta .90, and risk free and market return are 8% and 12% respectively. b) If required return
15% and beta 1.25, as well as market premium 7%, what is risk free rate?
3. You have been given expected return for three projects likely A, B, C, individually over the
period 2010-2013.
Year
Asset A
Asset B
Asset C
2010
16%
17%
15%
2011
17
16
16
2012
18
15
17
2013
19
14
18
Using these assets, you have isolated the three investment alternatives shown in the table.
Alternatives Investment
a) Calculate expected return
1
100% of asset A
2
50% of asset A and 50% of B
for three alternatives. b)
3
50% of Asset A and 50% of C
Calculate
standard
deviation.
b) Calculate C V for three alternatives. D) Which one do you recommend?
4. An investor is forming a portfolio by investing RM50000 in a stock A that has a beta of 1.5 and RM
25000 in stock B that has a beta of .90. The return on the market is equal to 6% and MGS have a yield
of 4%. What is the rate of return on the investors portfolio?
5. Company As stock is currently selling for RM 40 per share. The stock is expected to pay RM 2
dividend at the end of the year. The constant growth rate of the dividend is 7% forever. If risk free rate 6%
and market risk premium is also 6%, what is the stocks beta?
6. Micro pub Inc is considering the purchase of one of two cameras, R and S. Both should provide
benefits over 10 years and each require initial investment of RM4000.

Initial
investment
Pessimistic
Most likely
Optimistic

Camera R
Amount
4000
20%
25
30

Probability
1

Camera S
Amount
4000

Probability
1

.25
.50
.25

15%
25
35

.2
.55
.25

A) Calculate the range for both

cameras. B) Determine the
expected value of return for
each camera. C) Calculate
portfolio standard deviation.
Which
camera
do
you
recommend?

7. You are considering two alternative investment proposals. Project Xs expected rate of return

is 7.3% and its standard deviation of return is 4.26%. For Project Y, you have obtained the following
possible outcomes:
Probability of Investment

State of economy

Occurrence Returns

State 1: Economic boom

15%

16%

State 2: Economic growth

45%

12%

State 3: Economic decline

25%

5%

State 4: Depression

15%

-5%

Based on the above data available, which investment proposal should you select?
8. Complete the following incomplete table for Bangi Management Services.

9. Now, suppose you are considering two alternative investment proposals, one of which is Bangi
Management Services and the other is Muda Consulting Group. You have also obtained the relevant data
of Muda Consulting Group, as follows:
Expected return = 16.9%
Standard deviation = 4.18%
Based on these data obtained, which investment do you consider as riskier? Explain why?(compare
between Q8 & Q9)