Expected Return Calculation for Miss Dimaano
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na1504.workExpected Return Calculation for Miss Dimaano
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Powered by AIReducing a portfolio's standard deviation decreases the total unsystematic risk without necessarily affecting systematic risk, as measured by beta. This implies improved diversification, which can lower total risk further. If beta does not increase significantly, the systematic risk remains similar while reducing excess return demands. Thus, overall risk is reduced, potentially maintaining or slightly lowering expected returns relative to risk .
The expected return of the real estate portfolio is the average of the expected returns of the individual properties. Calculate each property's expected return using CAPM: Property 1 = 4% + 1.2*6% = 11.2%, Property 2 = 4% + 1.3*6% = 11.8%, Property 3 = 4% + 1.5*6% = 13%. The portfolio's expected return is (11.2% + 11.8% + 13%)/3 = 12% .
To calculate the expected return, first determine each stock's expected return via the CAPM: Intel's expected return is 4% + 1.6*(10%-4%) = 13.6%, and Boeing's expected return is 4% + 1*(10%-4%) = 10%. The portfolio's expected return is 0.6*13.6% + 0.4*10% = 12.16% .
The required return of Sorbond Industries using the CAPM when the beta is 1.45 is calculated as 8% + 1.45*(13%-8%) = 15.25% . If the beta is decreased to 0.80, the required return becomes 8% + 0.80*(13%-8%) = 12%. A lower required return increases the market price per share as the discount rate for future cash flows is reduced, assuming other factors remain unchanged.
Unsystematic risk is seen through variance not explained by market movements. Calculate expected returns for each economic state and compare deviations. Stock I has higher expected return variability given distinct performances in recession and boom states compared to Stock II's consistent returns, indicating greater unsystematic risk in Stock I .
The portfolio's beta needs to be 1 since it's equally risky as the market. Given investments: A ($210,000, beta 0.85), B ($320,000, beta 1.20), and C ($470,000, beta 1.35 assuming remaining funds after A and B). The risk-free asset's beta is 0. Calculate the total beta: (0.85*0.21)+(1.20*0.32)+(1.35*0.47)+0 = 1.121, indicating restructuring for an exact match might be necessary .
The expected return on the market portfolio is calculated by taking the weighted average of the expected returns of companies D, E, and F based on their market values. Company D has 1,000,000 shares at $2 each with an 8% expected return, company E has 500,000 shares at $8 each with a 10% expected return, and company F has 1,600,000 shares at $2.50 each with a 21% expected return. First, calculate each company's market value: D = $2M, E = $4M, F = $4M. The total market value is $10M. The expected return is (20%*8%)+(40%*10%)+(40%*21%) = 15.8% .
To determine BHP's discount rate using CAPM, apply the formula: expected return = risk-free rate + beta*(market risk premium). The risk-free rate is 6% p.a., and the market risk premium is 7% p.a. Hence, BHP's expected return is 6% + 1.20*7% = 14.4% .
To calculate the expected return of the portfolio, consider the proportions: Assume the bond and stock are each 22.5% (since the restaurant is 55%), the portfolio return is 0.55*15% + 0.225*8% + 0.225*12% = 13.15% .
To determine which stock dominates between A and D using risk-return characteristics, plot each stock's expected return against its standard deviation. Stock A has an expected return of 20% with a standard deviation of 10%, while stock D also has an expected return of 20% but with a higher standard deviation of 15% . Since stock A offers the same expected return with lower risk, it dominates stock D.