CHAPTER 9 \u00e2\u0080\u0093
\nCHARACTERIZING RISK AND RETURN<\/p>\n
questions<\/p>\n
LG1 1. Why is the percentage return a more useful
\nmeasure than the dollar return? <\/p>\n
LG2 2. Characterize the historical return, risk, and
\nrisk-return relationship of the stock, bond and cash markets. <\/p>\n
LG3 3. How do we define risk in this chapter and how
\ndo we measure it? <\/p>\n
LG3 4. What are the two components of total risk?
\nWhich component is part of the risk-return relationship? Why?<\/p>\n
LG3 5. What\u00e2\u0080\u0099s the source of firm-specific risk?
\nWhat\u00e2\u0080\u0099s the source of market risk?<\/p>\n
LG3 6. Which company is
\nlikely to have lower total risk, General Electric or Coca-Cola? Why? <\/p>\n
LG3 7. Can a company change
\nits total risk level over time? How? <\/p>\n
LG4 8. What does the coefficient of variation
\nmeasure? Why is a lower value better for the investor?<\/p>\n
LG4 9. You receive an investment newsletter
\nadvertisement in the mail. The letter
\nclaims that you should invest in a stock that has doubled the return of the
\nS&P 500 Index over the last three months. It also claims that this stock is
\na surefire safe bet for the future. Explain how these two claims are
\ninconsistent with finance theory. <\/p>\n
LG5 10. What does diversification do to the risk and
\nreturn characteristics of a portfolio? <\/p>\n
LG5 11. Describe the diversification potential of two
\nassets with a ?0.8 correlation. What\u00e2\u0080\u0099s
\nthe potential if the correlation is +0.8? <\/p>\n
LG5 12. You are a risk adverse investor with a
\nlow-risk portfolio of bonds. How is it
\npossible that adding some stocks (which are riskier than bonds) to the
\nportfolio can lower the total risk of the portfolio? <\/p>\n
LG5 13. You own only two stocks in your portfolio but
\nwant to add more. When you add a third
\nstock, the total risk of your portfolio declines. When you add a tenth stock to the portfolio,
\nthe total risk declines. Adding which stock, the third or the tenth, likely
\nreduced the total risk more? Why? <\/p>\n
LG5 14. Many employees believe that their employer\u00e2\u0080\u0099s
\nstock is less likely to lose half of its value than a well diversified
\nportfolio of stocks. Explain why this belief is erroneous. <\/p>\n
LG6 15. Explain what we mean when we say that one
\nportfolio dominates another portfolio? <\/p>\n
LG6 16. Explain what the efficient frontier is and
\nwhy it is important to investors. <\/p>\n
LG6 17. If an investor\u00e2\u0080\u0099s desired risk level changes
\nover time, should the investor change the composition of his or her portfolio?
\nHow? <\/p>\n
LG7 18. Say you own 200
\nshares of Mattel and 100 shares of RadioShack. Would your portfolio return be
\ndifferent if you instead owned 100 shares of Mattel and 200 shares of
\nRadioShack? Why? <\/p>\n
problems<\/p>\n
basic problems<\/p>\n
LG1 9-1
\nInvestment Return FedEx Corp stock ended the previous year at $103.39
\nper share.
\n It
\npaid a $0.35 per share dividend last year.
\nIt ended last year at $106.69. If you owned 300 shares of FedEx, what
\nwas your dollar return and percent return?<\/p>\n
LG1 9-2
\nInvestment Return Sprint Nextel Corp stock ended the previous year at
\n$23.36 per share. It paid a $2.37 per
\nshare dividend last year. It ended last
\nyear at $18.89. If you owned 500 shares of Sprint, what was your dollar return
\nand percent return?<\/p>\n
LG2 9-3 Investment
\nReturn A corporate bond that you own at the beginning of the year is worth
\n$975. During the year, it pays $45 in interest payments and ends the year
\nvalued at $965. What was your dollar return and percent return?<\/p>\n
LG2 9-4 Investment Return A Treasury
\nbond that you own at the beginning of the year is worth $1,055. During the
\nyear, it pays $35 in interest payments and ends the year valued at $1,065. What
\nwas your dollar return and percent return?<\/p>\n
LG3 9-5
\nTotal RiskRank the following three stocks by their level of total risk,
\nhighest to lowest. Rail Haul has an average return of 12 percent and standard
\ndeviation of 25 percent. The average
\nreturn and standard deviation of Idol Staff are 15 percent and 35 percent; and
\nof Poker-R-Us are 9 percent and 20 percent. <\/p>\n
LG3 9-6
\nTotal RiskRank the following three stocks by their total risk level,
\nhighest to lowest. Night Ryder has an average return of 12 percent and standard
\ndeviation of 32 percent. The average
\nreturn and standard deviation of WholeMart are 11 percent and 25 percent; and
\nof Fruit Fly are 16 percent and 40 percent. <\/p>\n
LG4 9-7
\nRisk versus ReturnRank the following three stocks by their risk-return
\nrelationship, best to worst. Rail Haul has an average return of 12 percent and
\nstandard deviation of 25 percent. The
\naverage return and standard deviation of Idol Staff are 15 percent and 35
\npercent; and of Poker-R-Us are 9 percent and 20 percent. <\/p>\n
LG4 9-8
\nRisk versus ReturnRank the following three stocks by their risk-return
\nrelationship, best to worst. Night Ryder has an average return of 12 percent
\nand standard deviation of 32 percent.
\nThe average return and standard deviation of WholeMart are 11 percent
\nand 25 percent; and of Fruit Fly are 16 percent and 40 percent. <\/p>\n
LG6 9-9
\nDominant PortfoliosDetermine which one of these three portfolios
\ndominates another. Name the dominated
\nportfolio and the portfolio that dominates it.
\nPortfolio Blue has an expected return of 12 percent and risk of 18
\npercent. The expected return and risk of
\nportfolio Yellow are 15 percent and 17 percent, and for the Purple portfolio
\nare 14 percent and 21 percent. <\/p>\n
LG6 9-10
\nDominant PortfoliosDetermine which one of the three portfolios
\ndominates another. Name the dominated
\nportfolio and the portfolio that dominates it.
\nPortfolio Green has an expected return of 15 percent and risk of 21
\npercent. The expected return and risk of
\nportfolio Red are 13 percent and 17 percent, and for the Orange portfolio are
\n13 percent and 16 percent. <\/p>\n
LG7 9-11
\nPortfolio WeightsAn investor owns $4,000 of Adobe Systems stock, $5,000
\nof Dow Chemical, and $5,000 of Office Depot.
\nWhat are the portfolio weights of each stock?<\/p>\n
LG7 9-12
\nPortfolio WeightsAn investor owns $3,000 of Adobe Systems stock, $6,000
\nof Dow Chemical, and $7,000 of Office Depot.
\nWhat are the portfolio weights of each stock?<\/p>\n
LG7 9-13
\nPortfolio Return Year-to-date, Oracle had earned a ?1.34 percent
\nreturn. During the same time period,
\nValero Energy earned 7.96 percent and McDonalds earned 0.88 percent. If <\/p>\n
you have a portfolio made up of 30 percent
\nOracle, 25 percent Valero Energy, and 45 percent McDonalds, what is your
\nportfolio return?<\/p>\n
LG7 9-14
\nPortfolio Return Year to date, Yum Brands had earned a 3.80 percent
\nreturn. During the same time period,
\nRaytheon earned 4.26 percent and Coca-Cola earned ?0.46 percent. If you have a portfolio made up of 30 percent
\nYum Brands, 30 percent Raytheon, and 40 percent Coca-Cola, what is your
\nportfolio return?<\/p>\n
LG1 9-15
\nAverage Return The past five monthly returns for Kohl\u00e2\u0080\u0099s are 3.54
\npercent, 3.62 percent, ?1.68 percent, 9.25 percent, and ?2.56 percent. What is
\nthe average monthly
\n return?<\/p>\n
LG1 9-16
\nAverage Return The past five monthly returns for PG&E are ?3.17
\npercent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is
\nthe average monthly return?<\/p>\n
LG3 9-17
\nStandard Deviation Compute the standard deviation of Kohls\u00e2\u0080\u0099 monthly
\nreturns shown in Problem 9-15.
\nLG3 9-18
\nStandard Deviation Compute the standard deviation of PG&E\u00e2\u0080\u0099s monthly
\nreturns shown in Problem 9-16. <\/p>\n
LG2&4 9-19
\nRisk versus Return in Bonds Assess the risk-return relationship of the
\nbond market (see Tables 9.2 and 9.4) during each decade since 1950. <\/p>\n
Compute the coefficient of variation for each decade using
\nthe standard deviation and average return:<\/p>\n
Decade<\/p>\n
CoV<\/p>\n
1950s<\/p>\n
NA<\/p>\n
1960s<\/p>\n
3.88<\/p>\n
1970s<\/p>\n
1.19<\/p>\n
1980s<\/p>\n
1.12<\/p>\n
1990s<\/p>\n
1.35<\/p>\n
2000s<\/p>\n
1.29<\/p>\n
LG2&4 9-20
\nRisk versus Return in T-bills Assess the risk-return relationship in
\nT-bills (see Tables 9.2 and 9.4) during each decade since 1950. <\/p>\n
Compute the coefficient of variation for each decade using
\nthe standard deviation and average return:<\/p>\n
Decade<\/p>\n
CoV<\/p>\n
1950s<\/p>\n
0.40<\/p>\n
1960s<\/p>\n
0.33<\/p>\n
1970s<\/p>\n
0.29<\/p>\n
1980s<\/p>\n
0.29<\/p>\n
1990s<\/p>\n
0.24<\/p>\n
2000s<\/p>\n
0.68<\/p>\n
LG4&5 9-21
\nDiversifying Consider the characteristics of the following three
\nstocks: <\/p>\n
Expected Return<\/p>\n
Standard Deviation<\/p>\n
Thumb Devices<\/p>\n
13%<\/p>\n
23%<\/p>\n
Air Comfort<\/p>\n
10<\/p>\n
19<\/p>\n
Sport Garb<\/p>\n
10<\/p>\n
17<\/p>\n
LG4&5 9-22
\nDiversifying Consider the characteristics of the following three
\nstocks: <\/p>\n
Expected Return<\/p>\n
Standard Deviation<\/p>\n
Pic Image<\/p>\n
11%<\/p>\n
19%<\/p>\n
Tax Help<\/p>\n
9<\/p>\n
19<\/p>\n
Warm Wear<\/p>\n
14<\/p>\n
25<\/p>\n
LG7 9-23
\nPortfolio Weights If you own 300 shares of Alaska Air at $42.88, 350
\nshares of Best Buy at $51.32, and 250 shares of Ford Motor at $8.51, what are
\nthe portfolio weights of each stock? <\/p>\n
LG7 9-24
\nPortfolio Weights If you own 400 shares of Xerox at $17.34, 500 shares
\nof Qwest at $8.15, and 350 shares of Liz Claiborne at $44.73, what are the
\nportfolio weights of each stock? <\/p>\n
LG7 9-25
\nPortfolio Return At the beginning of the month, you owned $5,500 of
\nGeneral Dynamics, $7,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics,
\nStarbucks, and Nike were 6.80 percent, ?1.36 percent, and ?0.54 percent. What is your portfolio return?<\/p>\n
LG7 9-26
\nPortfolio Return At the beginning of the month, you owned $6,000 of News
\nCorp, $5,000 of First Data, and $8,500 of Whirlpool. The monthly returns for News Corp, First
\nData, and Whirlpool were 8.24 percent, ?2.59 percent, and 10.13 percent. What\u00e2\u0080\u0099s your portfolio return?<\/p>\n
LG2&5 9-27
\nAsset Allocation You have a portfolio with an asset allocation of 50
\npercent stocks,
\n 40
\npercent long-term Treasury bonds, and 10 percent T-bills. Use these weights and
\nthe returns in Table 9.2 to compute the return of the portfolio in the year
\n2000 and each year since. Then compute
\nthe average annual return and standard deviation of the portfolio and compare
\nthem with the risk and return profile of each individual asset class. <\/p>\n
LG2&5 9-28
\nAsset Allocation You have a portfolio with an asset allocation of 35
\npercent stocks, 55 percent long-term Treasury bonds, and 10 percent T-bills.
\nUse these weights and the returns in Table 9.2 to compute the return of the
\nportfolio in the year 2000 and each year since.
\nThen compute the average annual return and standard deviation of the
\nportfolio and compare them with the risk and return profile of each individual
\nasset class. <\/p>\n
LG7 9-29
\nPortfolio Weights You have $15,000 to invest. You want to purchase shares of Alaska Air at
\n$42.88, Best Buy at $51.32, and Ford Motor at $8.51. How many shares of each company should you
\npurchase so that your portfolio consists of 30 percent Alaska Air, 40 percent
\nBest Buy, and 30 percent Ford Motor? Report only whole stock shares. <\/p>\n
LG7 9-30
\nPortfolio Weights You have $20,000 to invest. You want to purchase shares of Xerox at
\n$17.34, Qwest at $8.15, and Liz Claiborne at $44.73. How many shares of each company should you
\npurchase so that your portfolio consists of 25 percent Xerox, 40 percent Qwest,
\nand 35 percent Liz Claiborne? Report only whole stock shares. <\/p>\n
LG7 9-31
\nPortfolio Return The table below shows your stock positions at the
\nbeginning of the year, the dividends that each stock paid during the year, and
\nthe stock prices at the end of the year. What is your portfolio dollar return
\nand percentage return?<\/p>\n
Company<\/p>\n
Shares<\/p>\n
Beginning of Year Price<\/p>\n
Dividend per Share<\/p>\n
End of Year Price<\/p>\n
US Bank<\/p>\n
300<\/p>\n
$43.50<\/p>\n
$2.06<\/p>\n
$43.43<\/p>\n
PepsiCo<\/p>\n
200<\/p>\n
59.08<\/p>\n
1.16<\/p>\n
62.55<\/p>\n
JDS Uniphase<\/p>\n
500<\/p>\n
18.88<\/p>\n
16.66<\/p>\n
Duke Energy<\/p>\n
250<\/p>\n
27.45<\/p>\n
1.26<\/p>\n
33.21<\/p>\n
Solution by spreadsheet:<\/p>\n
LG7 9-32
\nPortfolio Return The table below shows your stock positions at the
\nbeginning of the year, the dividends that each stock paid during the year, and the stock prices at the
\nend of the year. What is your portfolio dollar return and percentage return?<\/p>\n
Company<\/p>\n
Shares<\/p>\n
Beginning of Year Price<\/p>\n
Dividend per Share<\/p>\n
End of Year Price<\/p>\n
Johnson Controls<\/p>\n
350<\/p>\n
$72.91<\/p>\n
$1.17<\/p>\n
$85.92<\/p>\n
Medtronic<\/p>\n
200<\/p>\n
57.57<\/p>\n
0.41<\/p>\n
53.51<\/p>\n
Direct TV<\/p>\n
500<\/p>\n
24.94<\/p>\n
24.39<\/p>\n
Qualcomm<\/p>\n
250<\/p>\n
43.08<\/p>\n
0.45<\/p>\n
38.92<\/p>\n
LG3&4 9-33
\nRisk, Return, and Their Relationship Consider the following annual
\nreturns of Estee Lauder and Lowe\u00e2\u0080\u0099s Companies: <\/p>\n
Estee Lauder<\/p>\n
Lowe\u00e2\u0080\u0099s Companies<\/p>\n
Year 1<\/p>\n
23.4%<\/p>\n
?6.0%<\/p>\n
Year 2<\/p>\n
?26.0<\/p>\n
16.1<\/p>\n
Year 3<\/p>\n
17.6<\/p>\n
4.2<\/p>\n
Year 4<\/p>\n
49.9<\/p>\n
48.0<\/p>\n
Year 5<\/p>\n
?16.8<\/p>\n
?19.0<\/p>\n
LG3&4 9-34
\nRisk, Return, and Their Relationship Consider the following annual
\nreturns of Molson Coors and International Paper: <\/p>\n
Molson Coors<\/p>\n
International Paper<\/p>\n
Year 1<\/p>\n
16.3%<\/p>\n
4.5%<\/p>\n
Year 2<\/p>\n
?9.7<\/p>\n
?17.5<\/p>\n
Year 3<\/p>\n
36.5<\/p>\n
?0.2<\/p>\n
Year 4<\/p>\n
?6.9<\/p>\n
26.6<\/p>\n
Year 5<\/p>\n
16.2<\/p>\n
?11.1<\/p>\n
Compute each stock\u00e2\u0080\u0099s average return, standard deviation,
\nand coefficient of variation. Which
\nstock appears better? Why?<\/p>\n
9-35
\nExcel Problem Below are the monthly returns for May 2005 to October 2010
\nof three international stock indices; All Ordinaries of Australia, Nikkei 225
\nof Japan, and FTSE 100 of England. <\/p>\n
Date<\/p>\n
All
\n Ordinaries<\/p>\n
NIKKEI
\n 225<\/p>\n
FTSE<\/p>\n
October-10<\/p>\n
2.08%<\/p>\n
-1.78%<\/p>\n
2.28%<\/p>\n
September-10<\/p>\n
4.46%<\/p>\n
6.18%<\/p>\n
6.19%<\/p>\n
August-10<\/p>\n
-1.52%<\/p>\n
-7.48%<\/p>\n
-0.62%<\/p>\n
July-10<\/p>\n
4.22%<\/p>\n
1.65%<\/p>\n
6.94%<\/p>\n
June-10<\/p>\n
-2.89%<\/p>\n
-3.95%<\/p>\n
-5.23%<\/p>\n
May-10<\/p>\n
-7.87%<\/p>\n
-11.65%<\/p>\n
-6.57%<\/p>\n
April-10<\/p>\n
-1.21%<\/p>\n
-0.29%<\/p>\n
-2.22%<\/p>\n
March-10<\/p>\n
5.20%<\/p>\n
9.52%<\/p>\n
6.07%<\/p>\n
February-10<\/p>\n
1.18%<\/p>\n
-0.71%<\/p>\n
3.20%<\/p>\n
January-10<\/p>\n
-5.85%<\/p>\n
-3.30%<\/p>\n
-4.15%<\/p>\n
December-09<\/p>\n
3.55%<\/p>\n
12.85%<\/p>\n
4.28%<\/p>\n
November-09<\/p>\n
1.48%<\/p>\n
-6.87%<\/p>\n
2.90%<\/p>\n
October-09<\/p>\n
-1.95%<\/p>\n
-0.97%<\/p>\n
-1.74%<\/p>\n
September-09<\/p>\n
5.69%<\/p>\n
-3.42%<\/p>\n
4.58%<\/p>\n
August-09<\/p>\n
5.52%<\/p>\n
1.31%<\/p>\n
6.52%<\/p>\n
July-09<\/p>\n
7.64%<\/p>\n
4.00%<\/p>\n
8.45%<\/p>\n
June-09<\/p>\n
3.53%<\/p>\n
4.58%<\/p>\n
-3.82%<\/p>\n
May-09<\/p>\n
1.83%<\/p>\n
7.86%<\/p>\n
4.10%<\/p>\n
April-09<\/p>\n
6.01%<\/p>\n
8.86%<\/p>\n
8.09%<\/p>\n
March-09<\/p>\n
7.14%<\/p>\n
7.15%<\/p>\n
2.51%<\/p>\n
February-09<\/p>\n
-5.21%<\/p>\n
-5.32%<\/p>\n
-7.70%<\/p>\n
January-09<\/p>\n
-4.95%<\/p>\n
-9.77%<\/p>\n
-6.42%<\/p>\n
December-08<\/p>\n
-0.36%<\/p>\n
4.08%<\/p>\n
3.41%<\/p>\n
November-08<\/p>\n
-7.78%<\/p>\n
-0.75%<\/p>\n
-2.04%<\/p>\n
October-08<\/p>\n
-14.00%<\/p>\n
-23.83%<\/p>\n
-10.71%<\/p>\n
September-08<\/p>\n
-11.20%<\/p>\n
-13.87%<\/p>\n
-13.02%<\/p>\n
August-08<\/p>\n
3.22%<\/p>\n
-2.27%<\/p>\n
4.15%<\/p>\n
July-08<\/p>\n
-5.26%<\/p>\n
-0.78%<\/p>\n
-3.80%<\/p>\n
June-08<\/p>\n
-7.64%<\/p>\n
-5.98%<\/p>\n
-7.06%<\/p>\n
May-08<\/p>\n
2.07%<\/p>\n
3.53%<\/p>\n
-0.56%<\/p>\n
April-08<\/p>\n
4.57%<\/p>\n
10.57%<\/p>\n
6.76%<\/p>\n
March-08<\/p>\n
-4.67%<\/p>\n
-7.92%<\/p>\n
-3.10%<\/p>\n
February-08<\/p>\n
-0.39%<\/p>\n
0.08%<\/p>\n
0.08%<\/p>\n
January-08<\/p>\n
-11.28%<\/p>\n
-11.21%<\/p>\n
-8.94%<\/p>\n
December-07<\/p>\n
-2.62%<\/p>\n
-2.38%<\/p>\n
0.38%<\/p>\n
November-07<\/p>\n
-2.74%<\/p>\n
-6.31%<\/p>\n
-4.30%<\/p>\n
October-07<\/p>\n
3.01%<\/p>\n
-0.29%<\/p>\n
3.94%<\/p>\n
September-07<\/p>\n
5.32%<\/p>\n
1.31%<\/p>\n
2.59%<\/p>\n
August-07<\/p>\n
0.98%<\/p>\n
-3.94%<\/p>\n
-0.89%<\/p>\n
July-07<\/p>\n
-1.95%<\/p>\n
-4.90%<\/p>\n
-3.75%<\/p>\n
June-07<\/p>\n
-0.49%<\/p>\n
1.47%<\/p>\n
-0.20%<\/p>\n
May-07<\/p>\n
2.98%<\/p>\n
2.73%<\/p>\n
2.67%<\/p>\n
April-07<\/p>\n
3.00%<\/p>\n
0.65%<\/p>\n
2.24%<\/p>\n
March-07<\/p>\n
2.79%<\/p>\n
-1.80%<\/p>\n
2.21%<\/p>\n
February-07<\/p>\n
1.02%<\/p>\n
1.27%<\/p>\n
-0.51%<\/p>\n
January-07<\/p>\n
2.01%<\/p>\n
0.91%<\/p>\n
-0.28%<\/p>\n
December-06<\/p>\n
3.35%<\/p>\n
5.85%<\/p>\n
2.84%<\/p>\n
November-06<\/p>\n
2.03%<\/p>\n
-0.76%<\/p>\n
-1.31%<\/p>\n
October-06<\/p>\n
4.69%<\/p>\n
1.69%<\/p>\n
2.83%<\/p>\n
September-06<\/p>\n
0.65%<\/p>\n
-0.08%<\/p>\n
0.93%<\/p>\n
August-06<\/p>\n
2.48%<\/p>\n
4.42%<\/p>\n
-0.37%<\/p>\n
July-06<\/p>\n
-1.53%<\/p>\n
-0.31%<\/p>\n
1.63%<\/p>\n
June-06<\/p>\n
1.24%<\/p>\n
0.24%<\/p>\n
1.91%<\/p>\n
May-06<\/p>\n
-4.51%<\/p>\n
-8.51%<\/p>\n
-4.97%<\/p>\n
April-06<\/p>\n
2.35%<\/p>\n
-0.90%<\/p>\n
0.98%<\/p>\n
March-06<\/p>\n
4.28%<\/p>\n
5.27%<\/p>\n
2.99%<\/p>\n
February-06<\/p>\n
-0.04%<\/p>\n
-2.67%<\/p>\n
0.54%<\/p>\n
January-06<\/p>\n
3.64%<\/p>\n
3.34%<\/p>\n
2.52%<\/p>\n
December-05<\/p>\n
2.73%<\/p>\n
8.33%<\/p>\n
3.61%<\/p>\n
November-05<\/p>\n
3.87%<\/p>\n
9.30%<\/p>\n
1.99%<\/p>\n
October-05<\/p>\n
-3.92%<\/p>\n
0.24%<\/p>\n
-2.93%<\/p>\n
September-05<\/p>\n
4.06%<\/p>\n
9.35%<\/p>\n
3.41%<\/p>\n
August-05<\/p>\n
1.54%<\/p>\n
4.32%<\/p>\n
0.28%<\/p>\n
July-05<\/p>\n
2.76%<\/p>\n
2.72%<\/p>\n
3.31%<\/p>\n
June-05<\/p>\n
3.92%<\/p>\n
2.73%<\/p>\n
3.01%<\/p>\n
May-05<\/p>\n
3.23%<\/p>\n
2.43%<\/p>\n
3.38%<\/p>\n
A. Compute and compare each indices\u00e2\u0080\u0099 monthly average return
\nand standard deviation.<\/p>\n
B. Compute the
\ncorrelation between i) All Ordinaries and Nikkei 225, ii) All Ordinaries and
\nFTSE 100, and iii) Nikkei 225 and FTSE 100, and compare them.
\nC. Form a portfolio consisting of one third of each of the
\nindices and show the portfolio return each year, and the portfolio\u00e2\u0080\u0099s return and
\nstandard deviation. <\/p>\n
research it!
\nFollowing a Portfolio<\/p>\n
Following stocks in a portfolio is easier than ever. Many financial Web sites have the capability
\nto follow the stocks in your portfolio over time. Just enter your stocks, the number of shares,
\nyour purchase price, and your commission cost and you can see how your
\nportfolio is doing. These portfolio managers will update your portfolio as
\nstock prices change, minute to minute. Yahoo! Finance has a portfolio management
\ntool. Go to the site and start a portfolio to watch (which requires free
\nregistration). Try entering symbols EBAY, T, LMT, DUK, and GSK. As a start, assume you own 200 shares of
\neach. You can watch the value of the portfolio change and see how each stock is
\ndoing every day. (.finance.yahoo.com\/”>https:\/\/monkessays.com\/write-my-essay\/finance.yahoo.com\/)<\/p>\n
The portfolio might
\nlook something like this:<\/p>\n
.jpg”><\/p>\n
integrated minicase:Diversifying with Other Asset
\nClasses<\/p>\n
Many more types of investments are available besides stocks, bonds,
\nand cash securities. Many people invest
\nin real estate and in precious metals, primarily gold. What are the risk and
\nreturn characteristics of these investments and do they provide diversification
\nopportunities to the typical stock investor?
\n You can invest in
\nreal estate in many ways. You can build
\nproperties, own rental units, and trade raw land. These activities take enormous time and
\nexpertise. One of the easiest ways to invest in real estate is through real
\nestate investment trusts (REITs) that trade
\nlike stocks on the stock exchanges.
\nA REIT represents ownership in a portfolio consisting of a pool of real
\nestate assets. An index of all REITs is a good measure of the performance of
\nthe real estate market. The table below
\nshows the annual returns for the All REITs Index alongside the returns of the
\nS&P 500 Index. <\/p>\n
S&P 500
\n Index<\/p>\n
All REITs
\n Index<\/p>\n
Gold Price<\/p>\n
1975<\/p>\n
37.2%<\/p>\n
36.3%<\/p>\n
-19.9%<\/p>\n
1976<\/p>\n
23.8<\/p>\n
49.0<\/p>\n
-4.1<\/p>\n
1977<\/p>\n
-7.2<\/p>\n
19.1<\/p>\n
22.6<\/p>\n
1978<\/p>\n
6.6<\/p>\n
-1.6<\/p>\n
37.0<\/p>\n
1979<\/p>\n
18.4<\/p>\n
30.5<\/p>\n
126.5<\/p>\n
1980<\/p>\n
32.4<\/p>\n
28.0<\/p>\n
15.2<\/p>\n
1981<\/p>\n
-4.9<\/p>\n
8.6<\/p>\n
-32.6<\/p>\n
1982<\/p>\n
21.4<\/p>\n
31.6<\/p>\n
14.9<\/p>\n
1983<\/p>\n
22.5<\/p>\n
25.5<\/p>\n
-16.3<\/p>\n
1984<\/p>\n
6.3<\/p>\n
14.8<\/p>\n
-19.2<\/p>\n
1985<\/p>\n
32.2<\/p>\n
5.9<\/p>\n
5.7<\/p>\n
1986<\/p>\n
18.5<\/p>\n
19.2<\/p>\n
21.3<\/p>\n
1987<\/p>\n
5.2<\/p>\n
-10.7<\/p>\n
22.2<\/p>\n
1988<\/p>\n
16.8<\/p>\n
11.4<\/p>\n
-15.3<\/p>\n
1989<\/p>\n
31.5<\/p>\n
-1.8<\/p>\n
-2.8<\/p>\n
1990<\/p>\n
-3.2<\/p>\n
-17.3<\/p>\n
-1.5<\/p>\n
1991<\/p>\n
30.6<\/p>\n
35.7<\/p>\n
-10.1<\/p>\n
1992<\/p>\n
7.7<\/p>\n
12.2<\/p>\n
-5.7<\/p>\n
1993<\/p>\n
10.0<\/p>\n
18.5<\/p>\n
17.7<\/p>\n
1994<\/p>\n
1.3<\/p>\n
0.8<\/p>\n
-2.2<\/p>\n
1995<\/p>\n
37.4<\/p>\n
18.3<\/p>\n
1.0<\/p>\n
1996<\/p>\n
23.1<\/p>\n
35.8<\/p>\n
-4.6<\/p>\n
1997<\/p>\n
33.4<\/p>\n
18.9<\/p>\n
-21.4<\/p>\n
1998<\/p>\n
28.6<\/p>\n
-18.8<\/p>\n
-0.8<\/p>\n
1999<\/p>\n
21.0<\/p>\n
-6.5<\/p>\n
0.9<\/p>\n
2000<\/p>\n
-9.1<\/p>\n
25.9<\/p>\n
-5.4<\/p>\n
2001<\/p>\n
-11.9<\/p>\n
15.5<\/p>\n
0.7<\/p>\n
2002<\/p>\n
-22.1<\/p>\n
5.2<\/p>\n
25.6<\/p>\n
2003<\/p>\n
28.7<\/p>\n
38.5<\/p>\n
19.9<\/p>\n
2004<\/p>\n
10.9<\/p>\n
30.4<\/p>\n
4.6<\/p>\n
2005<\/p>\n
4.9<\/p>\n
8.3<\/p>\n
17.8<\/p>\n
2006<\/p>\n
15.8<\/p>\n
34.4<\/p>\n
24.0<\/p>\n
2007<\/p>\n
3.5<\/p>\n
-17.8<\/p>\n
31.1<\/p>\n
2008<\/p>\n
-35.5<\/p>\n
-40.0<\/p>\n
4.3<\/p>\n
2009<\/p>\n
23.45<\/p>\n
20.9<\/p>\n
25.0<\/p>\n
Gold has been a highly sought-after asset all over the world, and
\nhas retained at least some economic value over thousands of years. The United
\nStates has had a very chaotic
\nhistory with gold. Americans
\nhave sought to \u00e2\u0080\u009cstrike it rich\u00e2\u0080\u009d through gold rushes in North Carolina (early
\n1800s), California and Nevada (mid-1800s), and Alaska (late 1800s). Struggling in the Great Depression, President
\nFranklin D. Roosevelt ordered U.S. citizens to hand in all the gold they
\npossessed. The ban on U.S. citizens owning gold was not lifted until the end of
\n1974. The table also shows the return from gold prices.
\n The returns for stocks, real estate,
\nand gold are all volatile. However,
\nduring many years, the return of one asset is up while the others are down.
\nThis looks promising for diversification opportunities. <\/p>\n
a. Using a spreadsheet, compute the average return and standard
\ndeviation of each of the three asset classes. <\/p>\n
b. Compute the annual returns of a portfolio consisting of 50%
\nstocks \/ 40% real estate \/ 10% gold.
\nWhat is the average return and standard deviation of this
\nportfolio? Also compute the average
\nreturn and standard deviation of the following portfolios: 75%\/20%\/5% and
\n80%\/5%\/15%. How do these portfolios perform compared to owning just stocks? <\/p>\n
c. Plot the average return and standard deviation of the three
\nassets and the three portfolios on a risk-return graph like Figure 9.3.<\/p>\n","protected":false},"excerpt":{"rendered":"
CHAPTER 9 \u00e2\u0080\u0093 CHARACTERIZING RISK AND RETURN questions LG1 1. Why is the percentage return a more useful measure than the dollar return? LG2 2.\u2026<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8827,10099,10540,10536,10892,10538,10539,10537,10891],"tags":[10549,10616,10615,7687,10627,8857,10552,10295,10548,10622,8907],"class_list":["post-130186","post","type-post","status-publish","format-standard","hentry","category-australia-essays","category-buy-essay","category-cheap-essay-writers","category-get-assignments-done","category-page-paper","category-phd-essay-writers","category-research-paper-writing-service-for-any-topic","category-study-bay-essay","category-write-my-assignment-ireland","tag-ai-plagiarism-free-essay-writing-tool","tag-australian-best-tutors","tag-best-trans-tutors","tag-buy-essay-uk","tag-cheap-dissertation-writer","tag-help-with-writing-an-essay","tag-help-write-my-paper-ai-free","tag-homework-for-you","tag-online-essay-writers","tag-phd-essays","tag-write-my-essay-for-me"],"_links":{"self":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/130186","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/comments?post=130186"}],"version-history":[{"count":0,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/130186\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/media?parent=130186"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/categories?post=130186"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/tags?post=130186"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}