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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 investor’s portfolio? 5. Company A’s 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 X’s 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)