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# Ch.10-13 Test 3 Study guid Cheat Sheet 15024

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This 2 page Study Guide was uploaded by Matt Jenks on Tuesday December 16, 2014. The Study Guide belongs to 15024 at San Francisco State University taught by Professor Daniela Balkanska in Fall2014. Since its upload, it has received 285 views. For similar materials see Finance 350 in Finance at San Francisco State University.

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Date Created: 12/16/14

Ch10 Investment returns Measure the nancial results of an investment May be historical or expected Can be expressed in dollar terms or percentage terms Investment risk Perta Reward 0 Risk premium reward for hearing risk Excess return on a risky asset over and above the riskfree rate R actual return Rf risk free rate ER Expected return information publicly available information Does fundamental analysis using economic and accounting information to predict stock price work Strongform Ef cient Market nfc Ex LIIluauI I In III1I f z ii aIn IInn quotIn rnlin I Ex Historical Analysis Assume that you have 9 to 2013 sample period Avg Return Rbar 264615O6O211163239518404 observed the following historical annual returns for a stock over the past four years 15 9 6 and 12 What are the sample average variance and standard deviation of the stock returns Rbar 150906 124424 105 or 105 Sigmaquot2 var15105quot2 09105quot206105quot212105quot24 1045quot2015quot2045quot2015quot2 3 00015 Stnd Dev Square root of Ex Calculation returns On January 17 2014 you bought 500 shares of Microsoft stock at a price of 3650 One month later Microsoft issued a dividend of 028per share and you sold your shares for 3750 Dividends 500 shares x 28 140 Capital gains500 shares x 37503650500 Total return 640 Dividend yield 0283650077 Capital gains yield 375036503650274 nuuunrAiAn 1 f 1lI Ex Standard Dev The common stock of Whole Foods has produced retums of 9 13 11 6 and 5 for the past five years respectively What is the standard deviation of these returns Mean returnRbar 9131165564 Var09064quot213064quot211064quot2 0664quot205064quot251 00568 Stnd Dev Square root 00568 075366 754 Ex return on Investment Suppose you 2009 purchased 500 shares of J etElectro 2010 Corporation stock at a price of 2250 per 2011 share One year later the shares are selling for 2012 21 each In addition a dividend of 150 per 2013 share was paid at the end of the period What is the percentage return on the investment RD1P0 P1P0P0 152250 21 22502250 066667 0666670 Ex If capital markets are ef cient then there is no reason to believe that Example Stock Price Reaction to New Information Ex Return Dist The standard deviation for large company stocks over the period 19262012 was 202 with an annual arithmetic mean of 118What range of returns do you expect to see 68 of the time for large company stocks 95 of the time What is the likelihood that large company stocks will have a return of 286 or lower in 2013 Roughly 23 of the observations have annual returns between 84 and 32 118 202 95 of the observations are between 286 and 522 118404 The likelihood that the stock market will fall by i 286 or more in 2013 is 25 3 V 39 Ex Return Distributions The returns on long term gov bonds are normally distributed Based on historical record what is the approx probability that your return on these bonds will be less than 37 in a given year What range of returns would you expect to see 95 of the time What range would you expect to see 99 of the time Looking at the longterm government bond return history in Figure 1010 we see that the mean return was avg61 percent with a standard deviation of s98 percent In the normal probability distribution approximately 23 of the observations are within one standard deviation of the mean The range of returns you would expect to see 68 of the time is the mean plus or minus one standard deviation or 68 level Rmean or stnd Dev 61 98 37 to 159 This means that 13 of the observations are outside one standard deviation away from the mean Or PrRlt 37 or Rgt159 32 But we are only interested in one tail here that is returns less than 37 percent so PrRlt 37 16 The range of returns you would expect to see 95 percent of the time is the mean plus or minus 2 standard deviations or 95 level R m 1 2sigma 61 1 298 1350 to 2570 The range of returns you would expect to see 99 percent of the time is the mean plus or minus 3 standard deviations or 99 level R mi 3s prices you discover that you can make above normal returns on your investments if 139 you buy oil company stocks just before noon on any given trading day and then sell them immediately before the market closes that day This is a violation of weak form efficiency Suppose FCC has developed a camera with autofocusing feature which doubles the speed of these available now They just made an aririou today How will the stock price belhave under different market situatic EX A market is Weak form efficient all information i ii of every kind is reflected in stock prices False to and fully reilecls new information there l5 no ter subsequent increases and decreases Ch11 Scenario analysis expected returns are based on the probabilities of possible outcomes ER n sigma i1 PiRi where pi the probability of state occurring Ri the except Pab at the end correlation coef cient bw returns of A and B Sa Sb stnd devs of returns of A and B Risk Decomposition Total risk Systematic risk Unsystematic risk Syst 2 2 2 2 Ex Scenario Analysis 2 Prob of recession 1 Probboom ProbnormaIProbslowdov113 iw A9 I pected Return ER 0805 Ex Scenario Analysis Expected Returns ERaO3O15O5102O20099 or 99 ERb3255202O1177 or 177 Stnd Dev Saquot2 315O99quot2510O99quot22O2O99quot2OO2029 Sa square rt of OO2029 0450 or 45 Sbquot2 325177quot2 141 S Pab SabSa Sb OO3767 O45O863 97 State Probability Returi Boom 25 quotquotquot Ex P9l39f liQE3f Qf i 39Tfj and Stnd Dev Suppose that ERa6 ERb13 Normal 50 Ex Systematic risk is all that matters 39 i i h of E P i i i i Slowdoiivn 15 to a WeiidiVeiSi ed investor T The Ex CAPM Suppose that the risk free rate is x ortfolio Stnd Dev Using historical stock prices quot f k 002 current 90day TBill and the expected to calculate daily or weekly returns for two or more anilolilnt 0 Systematlc 11Sk1n 3 aftset market risk premium is 82 1926 stocks we can also calculate the standard deviations of re 2lt1V tiiilI1ilV 1 ia 1S y gsset is 2012 iiisioiicai risk premium of iaige Stocks Wei each stock s returns and the correlation of the returns measure y eta prea mg a TBills Microsoft s beta is 073 Calculate Suppose that We Caliculatez OA14 OB722 and pOrtfO11O aCmSS a number of assets Microsoft s expected return based on CAPM We d C1d IO put Of 011139 1l 1V Stl l 1 l 1t W111 e11m1na1e 311 of the P Fe 011 ERmSftRfBmSftERmRf p into stock A Sp sqri of 602 average the standard deviation of a i W 0m K M on Eii4il2iql60quot222quot2260405014 P0 f 1 Ciliechnei ii t1e mbe1i i fi Ex The projected risk premium is defined i inii2r nrwnm nn77A nn720 007710 cart I I I I assets int e port 0 10 is increase ut as the Sum of the expected return on a I Ex Disequilibrium CAPM Stock X has a beta of 14 and you believe it Will provide an expe is the st risky investment and the return on a risk free investment FALSE Ex If the total risk of firm A is greater than the total risk of firm B then the beta of firm A must be greater than the beta of firm B FALSE Ex Which of the following illustrate systematic risk 1 higher US trade deficit than expected II quarterly profit for GM came in as expected III lower quarterly sales for Ford than expected IV higher consumer confidence index than expected I and IV only Ex The riskfree rate is 4 and the expected market risk premium is 8 According to the CAPM what is the expected return on stock A with a beta of 15 Stock B has the Ex The expected market risk premium is 9 percent and the risk free rate is 3 percent What is the Ex There are two expected states of the economy The probability of a normal economy is 70 percent and the probability of a recession is 30 percent If the economy is normal Security A is Expected return for Stock A3 ERA Rf 1 bA expected to earn 20 percent and Security B is expected to earn 6 percent If the economy goes into a recession Security A is expected to earn 4 percent and Security B is expected to earn 24 percent What is the expected return on a portfolio that is invested 60 percent in A a

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