Characterizing Risk and Return
Overview
Respond to three questions and solve three computational problems about the risk-and-return relationship.
Every investment carries a different level of risk and return. It is useful to explore different measures of risk and learn how to compare risk with the return, as well as differentiate between standalone risk and portfolio, or market, risk.
Suggested Resources
Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association
Assessment Instructions
Respond to the questions and complete the problems.
Questions
In a Word document, respond to the following. Number your responses 1–3.
Define risk, and explain how it is measured.
Identify a source of firm-specific risk. What is the source of market risk?
discuss what the coefficient of variation measures.
Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.
Issues
In either a Word document or Excel spreadsheet, complete the following problems.
You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
If you select to solve the issues algebraically, be sure to show your computations.
If you use a financial calculator, show your input values.
If you use an Excel spreadsheet, show your input values and formulas.
In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.
Two years ago, Conglomco stock ended at $73.02 per share. Last year, the stock paid a $0.34 per share dividend. Conglomco stock ended last year at $77.24. If you owned 200 shares of Conglomco stock, what were your dollar return and percent return last year?
Compute the coefficient of variation for the following three stocks. Then rank them by their level of total risk, from highest to lowest:
Conglomco has an average return of 11 percent and standard deviation of 24 percent.
Supercorp has an average return of 16 percent and standard deviation of 37 percent.
Megaorg has an average return of 10 percent and standard deviation of 29 percent.
Year-to-date, Conglomco has earned a −1.64 percent return, Supercorp has earned a 5.69 percent return, and Megaorg has earned a 0.23 percent return. If your portfolio is made up of 40 percent Conglomco stock, 30 percent Supercorp stock, and 30 percent Megaorg stock, what is your portfolio return?
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