Revised Risk and Return

Question Description

MANAGERIAL FINANCE 3333

Please complete the attached assignment after you watch the risk & return video. https://troy.instructure.com/courses/58439/externa…

Part I (Based on the video): Fully watch the video and answer the following questions.

Question 1: According to the video, how do we define risk?

Question 2: According to the video, how would the risk of a portfolio consisting of stocks from a variety of economic sectors compare to one consisting of stocks from just one sector? What is the technical finance term for this concept?

Question 3: According to the video, what is the difference between std. dev. and beta in terms of measuring risk?

Question 4: According to the video, what are some caveats associated with CAPM?

Question 5: According to the video, what is the difference between systematic and unsystematic risk? How is each type of risk impacted by holding a well-diversified portfolio?

Part II

Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.

Compute the beta of the portfolio.
Compute the required return of the portfolio.

Question 2: You are given the following probability distribution for a stock:

Probability Outcome

.5 -6%

.5 18%

A) Compute the expected return.
B) Compute the standard deviation.
C) Compute the coefficient of variation.

Part III

Question 1: What is the rationale for the positive correlation between risk and expected return?

Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?

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