- Returns What is meant by the term ‘return’? What is the difference between monetary returns and percentage returns? Do monetary or percentage returns matter more to investors? Provide an example
- Holding Period Returns In what situations would you use a holding period return or a percentage return? Are the two measures the same?
- Return Statistics Why would you wish to present return distributions? How do you think the distributions would change when you incorporated inflation into the return statistics?
- Risk Statistics What do we mean by risk? In long-term investments, equities tend to give higher returns than bonds. Why, then, do all investors not invest in equities? Are such investors irrational?
- Other Return Measures What is the difference between arithmetic and geometric returns? Suppose you have invested in a company’s shares for the last 10 years. Which number is more important to you,
- Investment Selection Given that the Ukraine Stock Exchange was up by over 80 per cent in 2018, why didn’t all investors put their money in Ukraine?
- Investment Selection Given that the Venezuela stock exchange was down 94.9 per cent in 2018, why did investors continue to hold shares in Venezuela? Why didn’t they sell out before the market
- Equities versus Gambling Critically evaluate the following statement: ‘Investing in the stock market is just like gambling. It has no social value and investors do it purely to give them a
- Returns Two years ago, General Materials’ and Standard Fixtures’ share prices were the same. During the first year, General Materials’ share price increased by 10 per cent while Standard
- Historical Returns The historical returns presented in the chapter are not adjusted for inflation. What would happen to the estimated risk premium if we did account for inflation? The returns are
- Calculating Returns and Variability The returns of Lockhart Group plc and TJC plc are given below.Using the following returns, calculate the average returns, the variances and the standard deviations
- Risk Premiums Refer to Table 9.1 and look at the period 2008–2018.(a) Calculate the arithmetic average returns for each country’s stock market over this period.(b) Calculate the standard
- Calculating Returns and Variability You have observed the following prices for British Auto, the luxury car maker, for a number of years. Jan 2011: €26.87; Jan 2012: €35.19; Jan 2013: €32.17;
- Calculating Real Returns and Risk Premiums In Problem 15, suppose the average inflation rate over this period was 4.2 per cent and the average T-bill rate over the period was 5.1 per cent.(a) What
- Holding Period Return A firm had the following share prices: Jan 2015: £1.12; Jan 2016: £1.34; Jan 2017:£1.68; Jan 2018: £1.8825; Jan 2019: £2.18; Jan 2020: £2.07. The equity paid no dividends.
- Return Distributions Refer back to Table 9.3. What range of risk premiums would you expect to see 68 per cent of the time for Europe? What about 95 per cent of the time?
- Blume’s Formula Over a 30-year period an asset had an arithmetic return of 12 per cent and a geometric return of 10 per cent. Using Blume’s formula, what is your best estimate of the future
- Arithmetic and Geometric Returns An equity has had returns of 10 per cent, 15 per cent, 20 per cent,–12 per cent, 2 per cent, and –5 per cent over the last six years. What are its arithmetic and
- Using Return Distributions Assume that the returns from holding French shares are normally distributed. From Table 9.2, what is the approximate normal distribution probability that your money will
- Using Return Distributions Suppose the mean returns on long-term government bonds are 5.8 per cent, and are normally distributed with a standard deviation of 9.3 per cent. Based on the historical
- Distributions Your investment portfolio has earned returns of 400 per cent once in the last 10 years, zero per cent in 8 years out of the last 10 years and lost 90 per cent one year. What was the
- Inflation The inflation rates for the UK have been as follows, 2018: 2.5 per cent; 2017: 2.7 per cent; 2016:0.7 per cent; 2015: 0 per cent; and in 2014: 1.5 per cent. Calculate the average real
- Calculating Returns Go to the Yahoo! Finance website and look up any FTSE 100 company of your choice. Click on the Historical Prices link. Find its closing price yesterday and its closing price
- Value at Risk The monthly prices for Banco Ruida are as follows:Date Adj Close 01/03/2020 514.2 01/02/2020 518 03/01/2020 493.35 01/12/2019 492.75 01/11/2019 473 03/10/2019 533 01/09/2019 539
- Calculate the average arithmetic returns, the variances and the standard deviations for Mauritius. (30 marks)You have invested in the Mauritian stock market. Details on the performance of the market
- Calculate the geometric return on the Mauritius Stock Market and compare it to the arithmetic return.Comment on and explain the differences between the Mauritius arithmetic and geometric return. (20
- What was the holding period return on Mauritius equities over the period? (10 marks)You have invested in the Mauritian stock market. Details on the performance of the market are given below:Date
- Suppose the returns on Mauritius equities are normally distributed. Based on the data above, what is the approximate probability that your return on these will be less than –2 per cent in a given
- Review the difficulties in using historical data to measure expected returns on an investment. (20 marks)You have invested in the Mauritian stock market. Details on the performance of the market are
- Calculating Yields Download the historical monthly share prices for a company of your choice from Yahoo! Finance. Find the closing share price for yesterday and for exactly two years ago. The
- Calculating Average Returns Download the Monthly Adjusted Share Prices for a company of your choice. What is the return on the equity over the past 12 months? Now use the 1 Month Total Return and
- What advantages do the mutual funds offer compared to the company equity?You recently graduated from university, and your job search led you to West Coast Yachts at Kip Marina.Because you felt the
- Assume that you invest 5 per cent of your salary and receive the full 5 per cent match from West Coast Yachts. What APR do you earn from the match? What conclusions do you draw about matching
- Assume you decide you should invest at least part of your money in large-capitalization companies based in the United Kingdom. What are the advantages and disadvantages of choosing the Skandla
- The returns on the Skandla Small-Cap Fund are the most volatile of all the mutual funds offered in the retirement plan. Why would you ever want to invest in this fund? When you examine the expenses
- A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviation
- What portfolio allocation would you choose? Why? Explain your thinking carefully.You recently graduated from university, and your job search led you to West Coast Yachts at Kip Marina.Because you
- Individual Securities What are the main characteristics of individual security returns? Provide a definition of each characteristic and say why it is important.
- Expected Return, Variance and Covariance Explain what is meant by correlation and how it is used to measure the relationship between the returns on two securities. How is correlation related to
- Portfolio Risk and Return Why does naive diversification reduce the risk of a portfolio? What benefits does naive diversification bring to international investment strategies?
- The Efficient Set for Two Assets What is a minimum variance portfolio? In a world with only two assets, is it possible to have two portfolios with the same risk but different expected return? Explain
- The Efficient Set for Many Securities In a portfolio of many securities, all having positive correlation with one another, is it possible for the minimum variance portfolio to have zero risk? What
- Diversification Assume that every asset has the same expected return and variance. Furthermore, all assets have the same covariance with one another. As the number of assets in the portfolio grows,
- Riskless Borrowing and Lending Explain what is meant by an optimal portfolio. What are the conditions that must exist for there to be only one optimal portfolio? Do you think these conditions are
- Market Equilibrium Your company is following two stocks, ABC plc and XYZ plc, and your manager tells you the following:‘The shares of ABC plc have traded close to £15 for most of the past four
- Relationship between Risk and Expected Return Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible
- Criticisms of the CAPM Define the market portfolio and provide a brief overview of Roll’s (1977)critique. Do you agree or disagree with it? Why?
- Variations of the CAPM Explain what is meant by the CCAPM, HCAPM and X-CAPM. Why do you think these models are not popular with practitioners? Give an overview of the empirical evidence concerning
- Systematic Versus Unsystematic Risk Classify the following events as mostly systematic or mostly unsystematic:(a) The Bank of England’s base rate increases unexpectedly.(b) A company renegotiates
- Short Selling Explain what is meant by short selling. When is short selling profitable?
- Risk A broker has advised you not to invest in technology stocks because they have high standard deviations. Is the broker’s advice sound for a risk-averse investor like yourself? Why, or why not?
- Using CAPM An equity has a beta of 0.9 and an expected return of 9 per cent. A risk-free asset currently earns 2 per cent.(a) What is the expected return on a portfolio that is equally invested in
- Portfolio Risk Assume the risk-free rate is 3 per cent and the expected return on the FTSE 100 index is 9 per cent. The standard deviation of the market index is 23 per cent. You are managing the
- Using the SML W has an expected return of 12 per cent and a beta of 1.2. If the risk-free rate is 3 per cent, complete the following table for portfolios of W and a risk-free asset. Illustrate the
- Reward-to-risk Ratios Y has a beta of 1.50 and an expected return of 17 per cent. Z has a beta of 0.80 and an expected return of 10.5 per cent. If the risk-free rate is 5.5 per cent and the market
- Portfolio Returns and Deviations Shares in Hellenic Telecom have an expected return of 15 per cent and the standard deviation of these returns is 30 per cent. National Bank of Greece’s shares are
- Analysing a Portfolio You want to create a portfolio equally as risky as the market, and you have€1,000,000 to invest. Given this information, fill in the rest of the following table:Asset
- Analysing a Portfolio You have £24,000 to invest in a portfolio containing X, Y and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected
- Covariance and Correlation Based on the following information, calculate the expected return and standard deviation of each of the following equities. Assume each state of the economy is equally
- Covariance and Correlation Based on the following information, calculate the expected return and standard deviation for each of the following equities. What are the covariance and correlation between
- Portfolio Standard Deviation Suppose the expected returns and standard deviations of A and B are E(RA) = 0.15, E(RB) = 0.25, σA= 0.40, and σB = 0.65, respectively.(a) Calculate the expected return
- Correlation and Beta You have been provided the following data about the equities of three firms, the market portfolio and the risk-free asset:Expected Return Standard Deviation Correlation* Beta
- CAPM The expected rates of return on the French firms, Publicis and Renault, the market portfolio(CAC 40) and the risk-free asset are given below, along with the standard deviations of these
- Portfolios Below is given the standard deviation and correlation information on three South African companies, Afgri, Harmony Gold and SABMiller.Afgri Harmony Gold SABMiller Standard Deviation
- Systematic versus Unsystematic Risk Consider the following information about I and II:Rate of Return if State Occurs State of Economy Probability of State of Economy I II Recession 0.15 0.09 −0.30
- CML and SML Explain in detail, using diagrams to illustrate your answer, what is meant by the terms‘capital market line’ and ‘security market line’.
- SML Suppose you observe the following situation:Security Beta Expected Return Renewable Energy Corp 1.3 0.23 Statoil 0.6 0.13 Assume these securities are correctly priced. Based on the CAPM, what is
- Portfolio Theory This question is designed to test your understanding of the mean standard deviation diagram.(a) Draw a mean-standard deviation diagram to illustrate combinations of a risky asset and
- Covariance and Portfolio Standard Deviation There are three securities in the market. The following chart shows their possible payoffs:State Probability of Outcome Return on Security 1 Return on
- SML Suppose you observe the following situation:Return if State Occurs State of Economy Probability of State A B Bust 0.25 −0.10 −0.30 Normal 0.50 0.10 0.05 Boom 0.25 0.20 0.40(a) Calculate the
- Standard Deviation and Beta There are two securities in the market, A and B. The price of A today is€50. The price of A next year will be €40 if the economy is in a recession, €55 if the
- Company Beta Charles Ray plc has three main divisions: Oil & Gas, Minerals and Power & Industrial. Oil &Gas accounts for 40 per cent of the company’s assets and Minerals accounts for 35 per cent of
- Minimum Variance Portfolio Assume A and B have the following characteristics:Equity Expected Return (%) Standard Deviation (%)A 5 10 B 10 20 The covariance between the returns on the two equities is
- CAPM An investor holds a portfolio of three securities. She invests 30 per cent in A, 30 per cent in B and 40 per cent in C. The betas on A, B and C are 1.5, 0.6 and 1.1, respectively. If E(RM) = 12%
- Minimum Variance Portfolio Consider the table below. Using either the historical return or expected return and Solver, compute the minimum variance portfolio for the universe of three Norwegian
- Beta The following prices are for Rollway plc and the market index.Date Rollway plc Market Index Mar-20 1,187.00 5,768.50 Feb-20 1,077.00 5,871.50 Jan-20 941.00 5,681.60 Dec-19 852.00 5,572.30 Nov-19
- Assuming that the returns are explained by the capital asset pricing model, calculate the betas of L’Oréal and Daimler, and the risk of a portfolio holding L’Oréal and Daimler with an expected
- Construct a portfolio consisting of the Euro Stoxx 50 Index and the risk-free asset that will produce an expected return of 12 per cent. Contrast the risk on this portfolio with the risk of Daimler.
- Assuming that the expected return on an average security is 13 per cent with a standard deviation of 26 per cent, and the average covariance of returns between securities is +100, determine the
- Now assume that the returns on securities are independent. Continuing to assume that the expected return on an average security is 13 per cent with a standard deviation of 26 per cent, determine the
- Explain what is meant by the separation principle. (20 marks)Below, you are given the expected returns and standard deviations of L’Oréal and Daimler AG, the Euro Stoxx 50 Index of largest
- Considering the effects of diversification, how should Sarah respond to the suggestion that you invest 100 per cent of your retirement account in West Coast Yachts?You are discussing your retirement
- Sarah’s response to investing your retirement account entirely in West Coast Yachts has convinced you that this may not be the best alternative. You now consider that a 100 per cent investment in
- Using the returns for the Skandla Large-Cap Equity Fund and the Skandla Bond Fund, graph the opportunity set of feasible portfolios.You are discussing your retirement plan with Dan Ervin when he
- After examining the opportunity set, you notice that you can invest in a portfolio consisting of the bond fund and the large-cap equity fund that will have exactly the same standard deviation as the
- Examining the opportunity set, notice there is a portfolio that has the lowest standard deviation. This is the minimum variance portfolio. What are the portfolio weights, expected return and standard
- A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The portfolio with the
- The Accounting Equation Explain why the total value of the assets of a company should equal the sum of liabilities and equity.
- Book Values versus Market Values Explain the difference between book value and market value.Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When
- Operating Cash Flow Identify two circumstances where negative operating cash flow might not necessarily be a sign of deteriorating financial health. When can negative operating cash flow become
- Financial Ratio Analysis A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analysing financial
- Depreciation Explain what is meant by depreciation. Why is depreciation important to an accountant?
- The DuPont Identity Both ROA and ROE measure profitability. What does each of them measure, and which one is more useful for comparing two companies? Why?
- Building a Statement of Financial Position According to AEB Systems plc financial statements, the firm had current assets of £6.642 billion, non-current assets of £16.521 billion, current
- Building an Income Statement The UK insurance firm, Wheeler & Fox, had revenue of £38,440 million, total expenses of £37,133 million, tax of £487 million and zero depreciation. What is the net
- Earnings per Share Nordicbank has a price–earnings ratio of 6.35. If the firm’s share price is SKr71.70, what is its earnings per share?
- Market Values and Book Values Your company has just sealed a deal to sell a tract of land with accompanying warehouse for €3.2 million. This is significantly lower than the €7 million your firm
- Calculating Taxes The Dutch firm, Herrera NV has €273,000 in taxable income. Using Table 3.4, what is the company’s average tax rate? What is its marginal tax rate?
- Calculating NCF A firm has net revenues of £6,065 million (including net non-cash expenses). Net non-cash expenses (including depreciation) were £2,380 million. Cash outflows from investing
- Calculating Net Capital Spending Morena’s Driving School’s 2019 statement of financial position showed non-current assets of £4.2 million. One year later, the 2020 statement of financial

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