Buisness Finance - 2327 Words

â€Å"Chapter # 5, Risk and Return - Problems† QUESTION # 01 Jerome J. Jerome is considering investing in a security that has the following distribution of possible one-year returns: Probability of Occurrence|0.10|0.20|0.30|0.30|0.10| Possible return|-0.10|0.00|0.10|0.20|0.30| a. What is the expected return and standard deviation associated with the investment? b. Is there much â€Å"downside† risk? How can you tell? SOLUTION:- (a) Data Pi = 0.10, 0.20, 0.30, 0.30, 0.10 Ri = -0.10, 0.00, 0.10, 0.20, 0.30 = = R2 Formula = RiPi = POSSIBLE RETURN, Ri|PROBABILITY OF OCCURRENCE, Pi|(Ri) (Pi)|(Ri - )2 (Pi)| -0.10|0.10|-.01|(-.1 -.11)2(.10)| 0.00|0.20|.00|( .00 - .11)2(.20)| 0.10|0.30|.03|( .10 - .11)2(.30)|†¦show more content†¦This indicates that excess returns for the stock fluctuates less than excess returns for the stock fluctuate less than excess returns for the market portfolio. The stock has much less systematic risk than the market as a whole. It would be a defensive investment. QUESTION # 04 Assume that the CAPM approach is appropriate; compute the required rate of return for each of the following stocks, given a risk-free rate of 0.07 and an expected return for the market portfolio of 0.13: Stock|A|B|C|D|E| Beta|1.5|1.0|0.6|2.0|1.3| What implications can you draw? SOLUTION:- Data Rf = 0.07 m = 0.13 ÃŽ ² = A) 1.5 B) 1.0 C) 0.6 D) 2.0 E) 1.3 = Formula = Rf + (m + Rf) ÃŽ ² Req. (RA) = .07 + (.13 - .07) (1.5) = .16 Req. (RB) = .07 + (.13 - .07) (1.0) = .13 Req. (RC) = .07 + (.13 - .07) (0.6) = .106 Req. (RD) = .07 + (.13 - .07) (2.0) = .19 Req. (RE) = .07 + (.13 - .07) (1.3) = .148 Implication The relationship between required return and beta should be stressed. QUESTION # 05 On the basis of an analysis of past returns and of inflationary expectations, Marta Gomez feels that the expected return on stocks in general is 12 percent. The risk-free rate on short-term Treasury securities is now 7 percent. Gomez is particularly interested in the return prospects for Kessler Electronics Corporation. Based on monthly data for the past five years, she has fitted a characteristic line to the responsiveness of excess returnsShow MoreRelatedCorporate Financial Analysis Of Bj s Restaurant And Brewhouse827 Words   |  4 Pages Corporate financial analysis of BJ’s Restaurant and Brewhouse. BUS401: Principles of Finance Instructor: Kathleen Colquitt Loren J. Deitz 27 February 2017 Table of Contents Introduction and brief history of BJ’s†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 1 Financial statements review †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. 1 Income statement †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 2 Balance sheet †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. 2 Statement of cash flow .....†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. 2 Pro-Forma of projected financial statementsRead MoreEssay On Frank1422 Words   |  6 PagesBeing neither of the work force or a buisness head, it is difficult to take a stance on if a work day should be shortened or kept similarly the same. 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