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Portfolio Management and Capital Asset Pricing Model: Chapter 2 (Steven Roman)

1) A riskless asset provides a certain cash flow while a risky asset has uncertain future cash flows, making examples treasury bills, bonds, stocks, and corporate bonds. 2) Return is calculated using the change in price over the period for a stock, while risk is measured by the variance of returns, with expected return being the average return and annualized return converting the period return to a yearly rate. 3) Sample data is provided for PLDT stock prices over 12 months, with exercises calculating simple returns over periods, average return, and variance of returns as a measure of risk.

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70 views3 pages

Portfolio Management and Capital Asset Pricing Model: Chapter 2 (Steven Roman)

1) A riskless asset provides a certain cash flow while a risky asset has uncertain future cash flows, making examples treasury bills, bonds, stocks, and corporate bonds. 2) Return is calculated using the change in price over the period for a stock, while risk is measured by the variance of returns, with expected return being the average return and annualized return converting the period return to a yearly rate. 3) Sample data is provided for PLDT stock prices over 12 months, with exercises calculating simple returns over periods, average return, and variance of returns as a measure of risk.

Uploaded by

Kyle Velasco
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2 (STEVEN ROMAN)

Portfolio Management and Capital Asset Pricing Model



Section 2.1
Riskless and Risky Assets

A riskless asset is one that is certain to provide a given set of cash flows at given future
times. Examples of such an asset are treasury bills and treasury bonds.

Any uncertainty in the future amount of cash flow to be received by the investor from
the asset makes it a risky asset. Examples of risky assets are corporate bonds and stocks.


Return and Risk
Consider PLDT monthly stock price data for the past 12 months. Stock prices are
quoted in USD.
Date Open High Low Close Volume
Adj
Close
6/3/2013 71.05 71.72 62.1 67.86 96000 63.6
7/1/2013 67.76 71.34 64.2 70.48 64200 66.06
8/1/2013 69.87 71.76 59.04 63.35 88300 60.71
9/3/2013 63.46 72.09 61.8 67.84 82100 65.01
10/1/2013 67.81 71.36 65.68 66.15 150000 63.39
11/1/2013 66.44 66.44 59.26 62.53 106300 59.93
12/2/2013 62.55 62.87 58.63 60.08 117300 57.58
1/2/2014 60.08 61.5 58 59.58 93400 57.1
2/3/2014 59.17 60.51 56.88 60.2 170700 57.69
3/3/2014 60.12 63.63 59.01 61.02 96600 61.02
4/1/2014 61.29 65.03 60.54 64.5 61900 64.5
5/1/2014 64.61 68.08 64.02 65.55 80400 65.55
6/2/2014 65.89 67.99 62.49 67.18 49300 67.18

Let be the monthly simple return on the stock. Also let be the annualized monthly
simple return (per annum return). Then

)

Equivalently, we have

( )

)

Exercises
1. What is the simple return on the stock for the period April 1, 2014 to May 1,
2014?
2. What is the annualized monthly return for the said period?

In general, if the simple return on the stock for a period of length shorter than one
year and

are the stock prices at the beginning and end of the period,
respectively, then

)

Equivalently

( )

( )

Usually, is chosen so that there are periods of length in one year, that is,

. Thus we have

( )

)

Exercises
3. What is the simple return on the stock for the period October 2, 2013 to January
2, 2014?
4. What is the annualized simple return for the said period?


Expected return
The expected return is given by
()



Exercise
1. Estimate the sample mean return on one share of PLDT using the above 12-
month data of closing stock prices.


Risk
The risk of an asset is given by the variance of the return. That is

()

Exercise
2. Estimate the risk of PLDT stock using sample variance of the given data above.

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