Part II Workout Question: - Possible Rate of Return Probability

Part I
1. Discuss the overall purpose people have for investing

2. Define investment
3. Write the difference between investing and financing
4. Explain the difference between direct and indirect investing
5. List and explain investment alternatives
6. Distinguish investment and speculation
7. On February 1, you bought 100 share of stock for $34 a share and a year later you sold it
for $39 a share. During the year, you received a cash dividend of $1.50 a share. Compute
your HPR and HPY on this stock investment.
Part II workout question

Q1.) You are considering acquiring share of common stock in the ABC Beer
corporation. Your rate of return expectation are as follows:
ABC Beer corp.

Possible rate of return probability
-0.10 0.30
0.00 0.10
0.10 0.30
0.25 0.30
i.) Compute the expected return [E(Ri)] on your investment in ABC Beer
Q.2) Assume that there are two securities , namely A and B . stock A provides rate of return of 20 % if
the state of economy is at recession and 70 % if the state of the economy is at Boom . stock B gives 30
% and 10 % if the state of the economy is at recession and boom respectively .assume that in the
coming year the state of the economy has an equal chance of being at recession and at boom . the risk
free rate of return is 10%.
I. what is the expected return of the securities

II. How much is a risk premium
III. What if the probabilities for recession is 40 % and for Boom is 60%
1
Q.3) Assume that an investor has 20, 000 for investing in stock A and B ( which are in the above
example ). The investor wanted to invest 4000 0n stock A and the rest on stock B .
I. What is the expected rate of return of the portfolio
Q.4) your rate of return expectation for the common stock of Geda Disc
company during next year are
GEDA DISC CO.
Possible rate of return probability
-0.10 0.25
0.00 0.15
0.10 0.35
0.25 0.25
a. Compute the expected return [E(Ri)] on this investment , the variance of this
return and its standard deviation
b. Under what condition can the standard deviation be used to measure the
relative risk of two investment?
c. Under what condition the coefficient of variation must be used to measure
the relative risk of two investments?
Q.5) The zola and yoni corporation have the following joint probability distribution of return for thr
next year
State probability return Zola (%) return Yoni (%)
Boom 0.1 14 20
Recession 0.2 -5 -2
Normal 0.4 10 9
Recovery 0.1 9 14
Slow growth 0.2 12 18
Instruction :
A. What is the correlation of return between the Zola and yoni corporation ?
B. Determine the expected covariance of return for the Zola and Yoni corporation ?
C. What is your recommendation if an investor wants to put these assets to the same
portfolio ?
Q.6) ABC co. has a portfolio of five stocks with the following expected market value and return .
2
Stocks market values in birr return(%)
A 40,000 8
B 50,000 20
C 20,000 15
D 100,000 9
E 30,000 12
a.) Determine ABC’s expected portfolio return
PART III multiple question

1. .......... are financial assets
A. BOND
B. MACHINE
C. STOCKS
D. A AND C
E. B AND C
2. An example of derivative security is ……….
A. a common share of general motors
B. a call option on Mobil stock
C. a commodity future contract
D. B and c
E. A and B
3. ……….are examples of financial intermediaries
A. commercial banks
B. insurance companies
C. investment companies
D. credit union
E. all of the above
4. A Fixed income security pays………
a. A fixed level of income for the life of the owner
b. A fixed level of income for the life of the security
c. A variable level of income for owner on fixed income
d. None of the above
5. MONEY market securities ……….
a. Are short term
b. Pay a fixed income
c. Are highly market able
3
d. Are generally very low risk
e. All of the above
6. Asset allocation refers to ……..
a. Choosing which securities to hold based on their valuation
b. Investing only I safe securities
c. The allocation of assets in to broad asset classes
d. Bottom up analysis
e. All of the above
7. The firm of sun and moon purchased a share of ACME .com common stock exactly
one year ago for $ 45 . during the past year the common stock paid an annual dividend
of $2.40 . the firm sold the security today for $ 85 . what is the rate of return the firm
has earned ?
a. 5.3%
b. 194.2%
c. 88.9%
d. 94.2%
8. Which of the following statement regarding covariance is correct ?
a. Covariance always lies in the range -1 to +1
b. Covariance because it involves a squared value , must always be positive number
or zero
c. Low covariance among returns for different securities leads to high portfolio risk
d. Covariance can take on positive , negative or zero values
9. Total portfolio risk is ……………
a. Equal to systematic risk plus non diversifiable risk
b. Equal to avoidable risk plus diversifiable risk
c. Equal to systematic risk plus unavoidable risk
d. Equal to systematic risk plus diversifiable risk
10. Which of the following items describes an index measure of systematic risk ?
a. Beta
b. Standard deviation
c. Coefficient of variation
d. Variance

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Part I

1. Discuss the overall purpose people have for investing

Part II workout question

ABC Beer corp.

I. what is the expected return of the securities

I. What is the expected rate of return of the portfolio

Slow growth 0.2 12 18

a.) Determine ABC’s expected portfolio return

PART III multiple question

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