Submitted By rogerbinkley

Words 1147

Pages 5

Words 1147

Pages 5

The construction portfolio process concludes to be very complex. Statistical past performance, industry knowledge, future potential and relying on insights that are personal are typically what analysts rely on within the market in order to arrive at the final list. Maximizing returns while minimizing risk is the goal every investor aims for. An evaluation of individual securities as well as risk return trade off within isolation and the risk return trade off contribution of the entire portfolio. The managing and constructing of a portfolio simulation outlining the fundamentals within the construction of the portfolio in regards to the risk return trade off as well as the relationship among investment performance and strategy will be the structure of this memo. Casa Bonita Ceramics has selected me as the treasury analyst to determine the best stocks and allocate company resources in order to construct a successful portfolio. My decision will be detailed within this memo of the simulation, communicate the Sharpe ratio in the relation it has to investment decision as well as give recommendations for organization changes in the investment strategy to improve the investment performance.

Simulation Decisions

Given the excess cash generated in the previous year, Casa Bonita is considering the invest $800,000 in the stock market. Eight stocks have already been chosen. Given the high return consideration without the risk of capital loss in sight, narrowing down to four final stocks worth the investment would be beneficial. The four stocks chosen are Levinthal Defense Systems, Goldstein and Delaney Bank, Transconduit, Inc., and Desktop, Inc. The selection of stock was astute and provided wise judgment in stock selection diversity in order to reduce stock specific risks.

The $800,000 was the next step in allocating out in a maximized manner…...

...Determining the cost of equity and rate of return is an important financial principle. Company shareholders are able to make intelligent decisions when the information is readily available. This paper will describe three specific theories and models that yield the cost of equity. After providing a clear description of all three, I will focus on one particular model, the Capital Asset Pricing Model (CAPM), which is a simplistic approach to cost of equity. Then lastly, the CAPM will be applied to a few companies and discussed. Three Models There are several tools available to estimate the rate of return. Three of these tools are capital asset pricing model, the dividend growth model, and arbitrage pricing theory. Although similar, each has their distinct differences. The first model is the capital asset pricing model. This particular model “describes the relationship between risk and expected return, and it serves as a model for the pricing of risky securities.” (Investopedia, N.D.) It goes on to say that if the overall risk outweighs the return, investors should disregard as this would be a loss. CAPM is calculated by using the following formula: “Required (or expected) Return = RF Rate + (Market Return - RF Rate)*Beta” (Investopedia, N.D.) As shown, this calculation factors in a beta rate. The rule of thumb is, the larger the beta rate, the more risk. If the market is up (bull), and there is a high beta, the payout will be high. However, if the market is...

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...1. Which asset would the risk-averse financial manager prefer? (See below.) a. Asset A. b. Asset B. c. Asset C. d. Asset D. 2. Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio? a. Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable, risk. b. Adding more such stocks will reduce the portfolio’s beta. c. Adding more such stocks will increase the portfolio’s expected return. d. Adding more such stocks will reduce the portfolio’s market risk. e. Adding more such stocks will have no effect on the portfolio’s risk. 3. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is correct? a. The required returns on all three stocks will increase by the amount of the increase in the market risk premium. b. The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium. c. The required return of all stocks will remain......

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...Risk and Return Tradeoff Memo The construction portfolio process concludes to be very complex. Statistical past performance, industry knowledge, future potential and relying on insights that are personal are typically what analysts rely on within the market in order to arrive at the final list. Maximizing returns while minimizing risk is the goal every investor aims for. An evaluation of individual securities as well as risk return trade off within isolation and the risk return trade off contribution of the entire portfolio. The managing and constructing of a portfolio simulation outlining the fundamentals within the construction of the portfolio in regards to the risk return trade off as well as the relationship among investment performance and strategy will be the structure of this memo. Casa Bonita Ceramics has selected me as the treasury analyst to determine the best stocks and allocate company resources in order to construct a successful portfolio. My decision will be detailed within this memo of the simulation, communicate the Sharpe ratio in the relation it has to investment decision as well as give recommendations for organization changes in the investment strategy to improve the investment performance. Simulation Decisions Given the excess cash generated in the previous year, Casa Bonita is considering the invest $800,000 in the stock market. Eight stocks have already been chosen. Given the high return consideration without the risk of capital loss in sight...

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...Risk and return nexus in Malaysian stock market : Empirical evidence from CAPM SUMMARY From my review for this paper which is Risk and Return Nexus in Malaysian Stock Market : Empirical Evidence from CAPM before this, actually this paper examines the applicability of Capital Asset Pricing Model (CAPM) in explaining the risk-return relation in the Malaysian stock market for the period of January 1995 to December 2006. The test using linear regression method, was carried out on four models : the standard CAPM model with constant beta (Model I), the standard CAPM model with time-varying beta (Model II), the CAPM model conditional on segregating positive and negative market risk premiums with constant beta (Model III), as well as the CAPM model conditional on segregating positive and negative market risk premiums with time varying beta (Model IV). Empirical results indicate that both the standard CAPM models (Model I and Model II) are statistically insignificant. However, the CAPM models conditional on segregating positive and negative market risk premiums (Model III and Model IV) are statistically significant. In addition, this study also discovers that time varying beta provides better explanatory power. Then from the literatures that i have gone through, it can be concluded that there is no one model that can claim to have the absolute ability to predict the expected stock return. While some researchers are questioning CAPM and in favor of Fama and French (1993...

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...Valuation, Risk, and Return Five years ago, Laissez-Faire Recliners issued $10,000,000 of corporate bonds with a 30-year maturity. The bonds have a coupon rate of 10.125%, pay interest semiannually, and have a par value of $1,000 per bond. The bonds are currently trading at a price of $879.625 per bond. A 25-year Treasury bond with a 6.825% coupon rate (paid semi-annual) and $1,000 par is currently selling for $975.42. In order to find the yield spread between the corporate bonds and the Treasury bonds we must first find the yields of both bonds. The yield is the amount of return an investor can expect to receive from a bond. The yield for the corporate bond (found using the yield formula in excel) is 11.57%. The yield for the Treasury bond is 7.04%. The yield spread is found by adding these two percentages and finding the average (dividing by 2), in this case the yield spread is 9.30%. If you are considering an investment in Laissez-Faire’s bonds (that will be held to maturity) and require an 11% rate of return you would not invest in these bonds. You would invest solely in the corporate bonds, however that is not an option, so you would bypass this option since the bond yield falls below this 11% required rate of return. If you are considering a purchase of Laissez-Faire’s preferred stock, with a current market price of $42, a par value of $50, and a dividend amounting to 10% of par, you must calculate the actual value of the stock. In this case it falls at $40...

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...Risk & Return Analysis: Analyzing an equally weighted portfolio of investments in Amazon, Inc., Yahoo! Inc., and Direct TV stock compared to the S&P 500 Introduction: Every day, millions of investors spend countless hours following the stock market in the hopes of striking it rich. Making the right moves at the right moments is crucial when one looks to make large returns in the market. While luck affords many investors the opportunity to make lucrative returns in the stock market, this reward does not come without risk. In order to balance their returns and the amount of risk that they are exposed to, many investors create an investment portfolio as a means to mitigate risks in the market at the expense of foregoing potentially higher returns on their investment. To illustrate the effects that a diversified portfolio can have on the amount of risk an investor takes on as well as the returns that the investment generates, a sampling of three random stocks and the S&P 500 index was created to examine the effects that diversification has on investment risk. Investments: For this analysis, monthly stock data from December 1, 2009 – December 1, 2014 was compiled on three stocks and the S&P 500. The three investments chosen for the portfolio were Amazon.com Inc. (AMZN), Yahoo! Inc. (YHOO), and DirectTV. (DTV), and each represent 25% of the portfolio. In order to analyze the risks associated with each stock, a Risk-Free rate of interest must be established in...

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...Risk and Tradeoff Memo Joe A. Sears FIN/402 April 13, 2015 Richard E. Smith Risk and Tradeoff Memo To: Rainier Ekstrom From: Joe A. Sears Subject: Portfolio Selection and Investment Strategy According to risk and yield as well as the detailed assessment, the decision to select four investments was of high regards, in addition to making a choice to minimize risk, in addition portfolio diversification, which assisted in the reduced risks. In order to assist in making the correct decisions there are particular pieces of information of a company that is needed to help form the correct decision. Using this information assisted in arriving at selection of investments for Casta Bonita Ceramics. The four investments I decided on are Desktop, Inc. Leviathan Defense, Trans conduit, Inc., and Goldstein & Delaney Bank. By using diversification, techniques will help to achieve the highest returns. Portfolio diversity is essential to be considered when making proper implementations and decisions. The amount allotted for this portfolio is $800,000.00, amounts invested in each area of the portfolio is $216,327.00 in Desktop Inc., $175,939.00 in Levinthal Defense, $144,000.00 in Trans Conduit, Inc. and $221,348 Goldstein & Delaney Bank, totaling $ 757,614.00, with $42386 for cash Portfolio risk , Risk =17.19% with a return of 9.20%the Sharpe ratio is 25.86%. It was essential to have a better continuing portfolio for better income opportunity that made it a great...

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...Markowitz Mantra * Required Basic Concepts! As randomly selected securities are combined to create a portfolio, the __________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is __________ risk, while that remaining is __________ risk * o diversifiable; nondiversifiable; total o relevant; irrelevant; total o total; diversifiable; nondiversifiable o total; nondiversifiable; diversifiable The higher an asset's beta, * o the more responsive it is to changing market returns o the higher the expected return will be in a down market o the lower the expected return will be in an up market o the less responsive it is to changing market returns __________ probability distribution shows all possible outcomes and associated probabilities for a given event * o A continuous o An expected value o A discrete o A bar chart A beta coefficient of 0 represents an asset that * o is less responsive than the market portfolio o has the same response as the market portfolio o is more responsive than the market portfolio o is unaffected by market movement The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm * o False o True The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta) * 212 Gitman • Principles of Finance, Eleventh Edition o False o True...

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...Jennifer Reagan Fundamentals of Finance Characterizing Risk and Return 1. How do Cornett, Adair, and Nofsinger define risk in the M: Finance textbook and how is it measured? Risk is defined as the volatility of an asset’s returns over time. Standard deviation is of returns is used to measure this risk. This method measures the deviation from the average return. 2. What is the source of firm-specific risk? What is the source of market risk? The source of firm specific risk is uncertainty arising from micro-events that impact the first or industry. Market risk comes from macro-events that effect everyone to some extent. 3. What does the coefficient of variation measure? The coefficient of variation measures the amount of risk taken for each one percent of achieved return. It is determined by dividing standard deviation of the return by total return. 4. FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 300 shares of FedEx, what was your dollar return and percent return? Dollar return = (ending value-beginning value) + income = $106.69*300-103.39*300+.35*300 = $1095 Percentage Return = $1,095 ÷ ($103.39×300) = 0.0353 = 3.53% 5. Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff...

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...Investment and Portfolio Management: Risk and Return Marvin Brown is a savvy investor who is always looking for a sound company to include in his portfolio of stocks and bonds. Being somewhat risk-averse, his main objective is to buy stock in firms that are mature and well-established in their respective industries. Wal-Mart is one of the stocks Marv is currently considering for inclusion in his portfolio. Wal-Mart has four major areas of business: traditional Wal-Mart discount stores, Supercenters, Sam's Clubs, and international operations. Although Wal-Mart was established over 50 years ago, it continues to achieve growth through expansion. The Supercenter concept, which combines groceries and general merchandise, is extreme success as 75 new Supercenters were opened last year alone. Another 95 will be opening over the next two years. Sam's clubs have also seen success as 99 Pace stores (Pace is one of Sam's former Competitors) were converted to Sam's stores in 1995. In addition to taking over competitor stores, Sam's also opened 22 new stores of its own. Internationally, the picture is equally as rosy. In Canada, 122 former Woolco stores were converted to Wal-Mart discount stores. Expansion has reached Mexico and Hong Kong as well, as 24 Clubs and Supercenters and 3 "Value Clubs" were established, respectively. Wal-Mart plans to continue its reign as the world's largest retailer through expansion by developing the previously discussed 95 Wal-Mart discount stores, 12 new...

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... ESTIMATING RISK AND RETURN MARISOL ROSARIO MARCH 13, 2016 NANCY ODETT ESTIMATING RISK AND RETURN Question 1: * Proficient-level: "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return?" (Cornett, Adair, & Nofsinger, 2016, p. 258). * Distinguished-level: Explain the role of probability distribution in determining expected return. * Question 2: * Proficient-level: "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired" (Cornett, Adair, & Nofsinger, 2016. p. 258). * Distinguished-level: Provide examples of a portfolio for someone who is very risk averse and for someone who is less risk averse. * Question 3: * Proficient-level: Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns" (Cornett, Adair, & Nofsinger, 2016, p. 259). * Distinguished-level: Recalculate the expected return under a set of changed economic probabilities. * Question 4: * Proficient-level: "If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?" (Cornett, Adair, & Nofsinger, 2016, p. 259). * Distinguished-level: Identify which financial security's return is typically considered the risk-free rate. * Question 5...

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...Anthony Martin BUS3062 Prof. Jen Schnaible * Question 1: * Proficient-level: "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return?" (Cornett, Adair, & Nofsinger, 2016, p. 258). Expected return is considered “forward-looking” because it is the return investors expect to receive in the future. This comes in the form of compensation for the market risk taken. The challenge that practitioners face in utilizing expected return is not being able to precisely know what the future holds. Therefore, methods to estimate the expected return are created. * Distinguished-level: Explain the role of probability distribution in determining expected return. * Question 2: * Proficient-level: "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired" (Cornett, Adair, & Nofsinger, 2016. p. 258). An investor can allocate money between a risk-free security that has zero risk (β=0), and the market portfolio that has market risk (β=1). If 75% of the portfolio is invested in the market, then the portfolio will have a β=0.75. If only 25% is invested in the market, then the portfolio will have a market risk of β=0.25. * Distinguished-level: Provide examples of a portfolio for someone who is very risk averse and for someone who is less risk averse. The first example (β=0.75) might be taken by a less...

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... (.143)(. 082) 11-9 11.3 The Return and Risk for Portfolios Scenario Recession Normal Boom Expected return Variance Standard Deviation Stock Fund Rate of Squared Return Deviation -7% 0.0324 12% 0.0001 28% 0.0289 11.00% 0.0205 14.3% Bond Fund Rate of Squared Return Deviation 17% 0.0100 7% 0.0000 -3% 0.0100 7.00% 0.0067 8.2% Note that stocks have a higher expected return than bonds and higher risk. Let us turn now to the risk-return tradeoff of a portfolio that is 50% invested in bonds and 50% invested in stocks. 11-10 Portfolios Rate of Return Stock fund Bond fund Portfolio -7% 17% 5.0% 12% 7% 9.5% 28% -3% 12.5% Scenario Recession Normal Boom Expected return Variance Standard Deviation 11.00% 0.0205 14.31% 7.00% 0.0067 8.16% squared deviation 0.0016 0.0000 0.0012 9.0% 0.0010 3.08% The rate of return on the portfolio is a weighted average of the returns on the stocks and bonds in the portfolio: rP wB rB wS rS 5% 50% (7%) 50% (17%) 11-11 Portfolios Rate of Return Stock fund Bond fund Portfolio -7% 17% 5.0% 12% 7% 9.5% 28% -3% 12.5% Scenario Recession Normal Boom Expected return Variance Standard Deviation 11.00% 0.0205 14.31% 7.00% 0.0067 8.16% squared deviation 0.0016 0.0000 0.0012 9.0% 0.0010 3.08% The expected rate of return on the portfolio is a weighted average of the expected returns on the securities...

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...CHAPTER 13 RISK, RETURN, AND THE SECURITY MARKET LINE Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. On the other hand, there are some risks that affect all investments. This portion of the total risk of an asset cannot be costlessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns. 2. If the market expected the growth rate in the coming year to be 2 percent, then there would be no change in security prices if this expectation had been fully anticipated and priced. However, if the market had been expecting a growth rate other than 2 percent and the expectation was incorporated into security prices, then the government’s announcement would most likely cause security prices in general to change; prices would drop if the anticipated growth rate had been more than 2 percent, and prices would rise if the anticipated growth rate had been less than 2 percent. 3. a. systematic b. unsystematic c. both; probably mostly systematic d. unsystematic e. unsystematic f. systematic 4. a. a change in systematic risk has occurred; market prices in general will most likely decline. b. no change in unsystematic risk; company price will most likely stay constant. c. no change in systematic risk...

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...RISK AND RETURN Risk is existing in every business decision. For Eg: Selection of an asset for production department, developing a new product etc., Therefore decision maker has to asses the risk and return before taking any financial decision. To do so finance manager must learn to assess risk and return. Risk can be measured in different ways. Before going to learn the computation and return it is require understanding the followings: 1. Cash Flows: financial assets are expected to generate cash flows and risk of Financial assets assessed in terms of the variations of its expected cash inflows. 2. Risk can be measured either on stand alone basis or in a portfolio context 3. Classification of risk: the risk of assets is divided into two parts. a. Diversifiable Risk b. Market Risk. Diversifiable risk is a company’s’ specific risk and can be completely eliminated through diversification. On the other hand market risk arises from market movements and which cannot be eliminated through diversification. 4. Investors are Risk Averse: (unwilling/opposed) Generally investors are risk averse. It does not mean that investors do not buy risk assets, they buy risk assets, when they promise extra return for bearing extra risk. Risky investments provide relatively high return. Risk: Risk is the chance of financi8al loss or the variability of returns associated with a given assets. Assets that are having higher chances of loss ar viewed as more...

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