RISK AND RETURN

1. (Ross, p. 342 PDF). Example 10.1

Assume that a stock starts the year with a price of 25 dollars and ends with another of 35.
During the year, it paid a dividend of 2 dollars, what is the dividend yield,
capital gain and total return for the year?

2. (Berk (English), p. 365 PDF). Table 10.2

Calculate the annual returns obtained by the SP500 stocks between 2004 and 2010
Final of
SP500 Dividends
year
2004 1,211.92
2005 1,248.29 $23,15
2006 1,418.30 $27.16
2007 1,468.36 $27.86
2008 903.23 $21,85
2009 1,115.10 $27.19
2010 1,257.64 $25.44

RISK OF A SINGLE ASSET

3. (Van Horne, p. 125 PDF). Example

The table shows the expected values and the probability of occurrence of an asset:
Possible Probability of
performance occurrence
-0.10 0.05
-0.02 0.10
0.04 0.20
0.09 0.30
0.14 0.20
0.20 0.10
0.28 0.05
a. Determine the expected return of the asset.
b. Determine the standard deviation.
c. Suppose we are facing a normal continuous probability distribution of
Returns. What is the probability that the actual return is less than zero?
4. (Gitman, p. 343 PDF). Examples 8.4 to 8.7
The table presents the expected values of the returns of assets A and B of Norman.
Company and the probabilities of the most pessimistic outcome, the most likely, and the most optimistic:

Performance Performance
Probability Active A Active B
Pessimist 0.25 13% 7%
Most likely 0.50 15% 15%
Optimistic 0.25 17% 23%

a. Determine the expected return value of each project.

b. Determine the standard deviation of each project.
c. Assuming that the probability distributions of stock returns
Common stocks and bonds are normal, determine the yield range of each project.
for a confidence level of 68% and 95%.
d. Determine the coefficient of variation of each project.
e. Which project is the most risky? Why?

5. (Gitman, p. 347 PDF). Example 8.8

Marilyn Ansbro is reviewing stocks to include in her stock portfolio. The stocks
what you want to analyze are those of Danhaus Industries, Inc. (DII), a manufacturer of products
diversified for pets. One of their main concerns is the risk; as a rule
In general, she set out to invest only in stocks with a coefficient of variation below
0.75. Meeting data on prices and dividends of DII for the past 3 years, and
assume that the performance of each year is equally probable.

Stock Price Dividend

Year Initial Final paid
2020 $35,00 $36,50 $3.50
2021 $36.50 $34.50 $3.50
2022 $34,50 $35.00 $4,00
a. Calculate the rate of return for each year, from 2020 to 2022, of DII stocks.
b. Calculate the average return and the standard deviation of the returns during the
three years ago. (Suggestion: Treat this data as a sample).
c. Determine the coefficient of variation of the returns on the assets.
d. Based on the calculation from section c), should Marilyn include DII shares in her portfolio?
6. (Berk (English), p. 356 PDF). Example
The table shows the annual returns of the S&P 500 index for the period from 2005 to 2009:

Year Performance
2005 4.9%
2006 15.8%
2007 5.5%
2008 -37.0%
2009 26.5%
a. Calculate the average return of S&P 500 stocks.
b.(Page 358) Example 11.3. Calculate the standard deviation.

PORTFOLIO RISK

7. (Berk, p. 397 PDF). Table 11.1

The table shows the returns for three stock positions:
Expected performance
Year North Air West Air Tex Oil
1 21% 9% -2%
2 30% 21% -5%
3 7% 7% 9%
4 -5% -2% 21%
5 -2% -5% 30%
6 9% 30% 7%

a. Calculate the expected return and volatility of each of the stocks.

b. Calculate the expected return and the standard deviation over the period of 6 years
a portfolio of stocks with equal investments in the two airlines: North Air and West
Air.
c. Calculate the expected return and the standard deviation over the 6-year period of
a stock portfolio with equal investments in West Air and Tex Oil.
d.(Page 400 PDF). Table 11.2. Calculate the covariance and the coefficient of variation of each one of
the two alternatives. Which one is riskier?
8. (Solution)
Consider the following information:
State of the Action of Action of Action of
economy Probability Apple Cisco Hasbro
Eye 15% 30% 25% 9%
Well 35% 20% 16% 15%
Deficient 35% 15% 20% 21%
Crisis 15% 10% 10% 27%

a. Calculate the expected return and the standard deviation of each individual stock.
b. His portfolio is invested as follows: 25% in Apple stocks, 35% in stocks of
Hasbro and 40% in Cisco shares. What is the expected return and the deviation?
portfolio standard?

9. (Solution)
Suppose you want to create a portfolio with cryptocurrencies. The following table shows the
projections for the next 5 years:
Expected performance
Year
BNB Bitcoin Chilliz Ethereum Polygon Solana
2024 65% 50% 5% 50% 5% 11%
2025 50% 45% 35% 40% 75% 45%
2026 10% 30% 50% 30% 65% 70%
2027 50% 5% 70% -5% 50% 55%
2028 5% 15% 25% 35% 10% 5%

a. Calculate the expected return and the standard deviation of each cryptocurrency.
b. Your portfolio is invested as follows: 15% in BNB, 25% in Bitcoin, 20% in Chilliz, 25%
in Ethereum, 5% in Polygon and 10% in Solana, what is the expected return of the
portfolio?
And the standard deviation?

10. (Court, p. 594 and 595 PDF). Examples 9.14 and 9.15
I have knowledge that:
The return of the risk-free asset is 3.5%.
The expected return of the market portfolio is 10%.
The standard deviation of the expected returns of the market portfolio is 0.10.
The participation of the market portfolio in the asset portfolio formed by the
risk-free asset and the market portfolio is 60%.
Calculate the return and the volatility of the portfolio of assets formed by the risk-free asset.
risk and the market portfolio.
11. (Berk, p. 376 PDF). Table 11.4
The table shows the expected returns and the volatility of two stocks:
Performance Deviation
Action expected standard
Intel 26% 50%
Coca-Cola 6% 25%

If the returns of both companies are uncorrelated, calculate the return.

expected and the volatility of a portfolio when investing:

80% in Intel and 20% in Coca Cola.

b. 60% in Intel and 40% in Coca Cola.
40% in Intel and 60% in Coca Cola.
20% in Intel and 80% in Coca Cola.

12. (Brealey (English), p. 218 PDF). Table 8.1 Portfolio C

Suppose a stock portfolio with the following characteristics regarding capital.

inverted, the expected return, the standard deviation and the correlation between them:
Capital Performance Deviation
Action inverted expected standard
Starbucks $900 9.0% 30.0%
Newmont $2 550 7.0% 36.1%
Exxon Mobil $4 600 4.7% 19.1%
Johnson & Johnson (J&J) $8 475 3,8% 12.5%
Campbell Soup $8 475 3.1% 15.8%

Correlation between:

Starbucks and Newmont 0.42 Newmont and J&J 0.45

Starbucks and Exxon Mobile -0.31 Newmont and Campbell Soup 0.43
Starbucks and J&J 0.45 Exxon Mobile and J&J -0.47
Starbucks and Campbell Soup 0.65 Exxon Mobile and Campbell Soup -0.25
Newmont and Exxon Mobile 0.35 J&J and Campbell Soup -0.56

What is the expected return and standard deviation of the portfolio?

 DIVERSIFIABLE AND NON-DIVERSIFIABLE RISK

13. (Block, p. 340 PDF). Example

Consider the following possible returns of the stock of Parts Associates, Inc. (PAI),
how from the market to calculate the beta coefficient:

Parts Associates, Performance of

Year Inc. (PAI) market
1 12% 10%
2 16% 18%
3 20% 16%
4 16% 10%
5 6% 8%

a. Calculate the beta coefficient.

b. Formulate the regression equation between the returns of PAI stocks and the
market returns over time.
c. Calculate the expected return on PAI if market returns are expected
approach the historical rate of 11.6%.
d. Calculate the expected return on PAI If it is expected that the returns on the
market increase to 18% the following year.

CAPITAL ASSET PRICING MODEL (CAPM)

14. (Block, p. 341 PDF). Example

Suppose that the risk-free rate is 5.5% and that the market risk premium is 6.5%,
a. Calcule los rendimientos esperados de tres acciones con betas de 2, 1 y 0,5.
b. For each one, draw the Security Market Line (SML).
c. (Page 341 PDF). Example. If the risk-free rate increases by 2%, calculate the
expected return of the stock with a beta of 1. Graph the change in the SML.
d. (Page 341 PDF). Example. Calculate the expected returns of the three stocks if the
investors increase the market risk premium to 8%. Graph the change in the
SML

15. (Ross (2010), response p. 941). Exercise 13.14

An asset has an expected return of 10.2%, the risk-free rate is 4.5% and the
The market risk premium is 8.5%. What should be the beta coefficient of this stock?
 BETA OF A PORTFOLIO

16. (Ross (2010), p. 458). Example 13.6

Suppose you have the following investments:
Quantity Yield Beta of
Active Inverted expected active
A $1,000 8% 0.80
B $2,000 12% 0.95
C $3,000 15% 1,10
D $4,000 18% 1.40

What is the expected return of this portfolio? What is the beta of the portfolio? Is this
Does the portfolio have more or less systematic risk than an average asset?

17. (Ehrhardt, response p. 622 PDF). Self-assessment exercise 5.2

ECRI Corporation is a parent company with four major subsidiaries. Below is
give the percentage of the income coming from them, with their respective beta:
Percentage of
Subsidiary business Beta
Electric company 60% 0.70
Cable television company 25% 0.90
Real estate 10% 1.30
International projects 5% 1.50

a. What is the beta of the parent company?

b. Assume that the risk-free rate is 6% and that the market risk premium is 5%.
What will be the required rate of return?
c. The company plans to modify its strategic approach: it will reduce its dependence on the
electric subsidiary, so that the percentage of its income coming from it
they represent 50%. At the same time, it will increase their dependence on the division of
special/international projects, so that the percentage of their income comes from
from the subsidiaries increased to 15%. What will be the required rate of return of the
shareholders in case of adopting such changes?
 MULTIFACTORIAL MODELS

18. (Ross, page 418 PDF). Exercise 12.1

A researcher has determined that a two-factor model is appropriate for calculating the
performance of a stock. The factors are the percentage change in GDP and a rate of
interest. GDP is expected to grow by 3.5% and the interest rate is expected to be 2.9%. A stock
a beta of 1.2 on the percentage change in GDP and a beta of -0.8 on the rate of
interest. If the expected return rate of the stock is 11%. If GDP grows by 3.2% and the
Interest rates are 3.4%, what will the systematic risk be? Calculate the expected return.
reviewed of the action.

19. (Solution manual)

Assume that the total returns of two stocks in the mining industry can be
explain with a two-factor model. The following table shows the information of the
shares of Barrick Gold and Rio Tinto:
Sensitivity to the factors Performance
Fuel price Tipo de cambio total
Barrick Gold -0,201,18 18.50%
Rio Tinto -0,450,63 19.00%

If the expected return on each stock was 12%, what are the risk premiums of
each factor?

20. (Ross, response p. 1004 PDF). Exercise 12.2

Assume that a three-factor model is appropriate to describe the returns of a
action. The information about those three factors is presented in the following table:

Factor Beta Expected value Real value

GDP 0.0000479 $13 275 $13 601
Inflation -1.30 3.9% 3,2%
Interest rates -0.67 5.2% 4.7%

a. What is the systematic risk of the stock's return?

b. Suppose that bad and unexpected news about the company would be presented that
would cause the stock price to decrease by 2.6%. If the expected return of
The action is 10.8%, what will be the total yield of this action?
 Fama-French Three-Factor Model

21. (Brealey, p. 259 PDF). Table 9.3

The table shows some estimates of sensitivities to the three factors of Fama and French.
of five industrial points over 60 months until June 2006.
Sensitivity of the factors
Book value/
Market Size market value
Industry b1 b2 b3
Food industry 0.43 -0.09 0.28
Oil and gas company 0.77 0.21 0.73
Pharmaceutical 0.68 -0.62 -0.43
Telecommunications 1.36 -0.81 -0.05
Public Services 0.71 0.13 0.63

Assuming that the risk-free interest rate is 5%, the expected risk premium of
market, of 7%; the expected risk premium of the size factor, of 3.7%, and the premium of
expected risk of the accounting value/market value ratio, of 5.2%:
a. Calculate the expected return of each industry.
The capital asset pricing model (CAPM) estimates the following betas for each
industry (the values differ with respect to the market beta of the three-factor model of
Fama and French because the CAPM betas were estimated based on a regression.
simple):
Market
Industry b1
Food industry 0.36
Oil and gas company 0.70
Pharmaceutical 0.59
Telecommunications 1.14
Public Services 0.64

b. Calculate the expected return of each industry according to the CAPM and compare it with the
results obtained in section a.
 FAMA-FRENCH-CARHART FACTOR SPECIFICATION MODEL (FFC)

22. (Solution manual)

The following table shows the sensitivity of three stocks to the four Fama-French factors.
Carhart along with risk premiums during the period 2000-2005.
Company Risk premium
Factor Microsoft Exxon Mobil General Electric (monthly)
Market 1,068 0.243 0.747 0.64%
Size* -0.374 0.125 -0.478 0.17%
Book value/market value -0.814 0.144 -0.232 0.53%
Bag of the moment -0.226 -0.185 -0.147 0.76%

Calculate the monthly and annual capital cost of each company through the specification of
FFC factors, if the risk-free rate is 6%.

MARKET MODEL OR SINGLE FACTOR MODEL

23. (Solution)
The following three stocks are available in the market:
Performance
Action expected Beta
Intel 13.4% 0.85
AMD 11,8% 1.25
Nvidia 14.9% 0.9
Market 14.5% 1

Assume that the market model is valid.

a. Write the market model equation for each stock.
b. Assume that the market return is 13% and that there are nonsystematic surprises.
which raise the expected yields of AMD and Nvidia by 1%. What is the yield
of each action?
a. What is the performance of a portfolio with 40% weighting of Intel stock,
35% of AMD stock and 25% of Nvidia stock?
 CALCULATION OF THE BETA COEFFICIENTS

24. (Solution)
A model is desired to be built based on the three Fama-French factors to determine the
required return on stocks in the video game industry. Collected the
following data from the last 12 years:

Risk premiums
Systematic risk factors
Cousin Book value/
Year Performance Market Size Market value
1 2.40% 3.50% 6.10% -1.10%
2 -2.30% -1.35% -2.50% 2.40%
3 1.55% 2.30% 3.62% -0.88%
4 -1.18% -0.18% -1.03% 3.40%
5 2.90% 4,50% 4.90% -1.60%
6 -0.80% 0.08% -0.15% 1.98%
7 0.78% 1.50% 2.27% -1.00%
8 0.37% 1.45% 2.62% -0.10%
9 0.00% 0.00% 0.00% 0.00%
10 -0.43% 0.30% 0.49% 1.15%
11 1.00% 2.11% 2.00% 0.10%
12 1.32% 2.12% 2.40% 0.29%

a. Calculate the sensitivity of the systematic risk factors on the performance of the
actions.
b. If the risk-free rate is 4%, formulate the equation for the required return of the
actions of the video game industry.
c. Assume the following risk premiums:
Expected market risk premium: 7.5%.
Expected risk premium for the size factor: 5.2%.
Expected risk premium of the factor book value/market value ratio: -3.5%.
Calculate the expected return of video game industry stocks.
d. Calculate the expected return of the stocks in the video game industry according to the
capital asset pricing model (CAPM) and compare it with the result
obtained in the previous section. (Suggestion: calculate the sensitivity again of
market with a simple regression)
25.(Solution)
It is desired to build a model based on the four Fama-French-Carhart factors for
determine the required return on pharmaceutical industry stocks.
they collected the following data from the last 10 years:

Cousin of Book value/ Wallet of the

Year Performance Market Size Market value moment
1 2.40% 2.50% 5.40% -2.00% 3.00%
2 -2.30% -2.35% -3.60% 1.50% -3.00%
3 1.55% 1.30% 2.52% -1.78% 1.00%
4 -1.18% -1.18% -2.13% 2.50% -1.18%
5 2.90% 3.50% 3.80% -2.50% 3.00%
6 -0.80% -0.92% -1,25% 1.08% -0.92%
7 0.78% 0.50% 1.17% -1.90% 0.50%
8 0.37% 0.45% 1.52% -1.00% 0.45%
9 0.00% 0.00% 0.03% -0.08% 0.00%
10 -0.43% -0.70% -0.61% 0.25% -0.80%

a. Calculate the sensitivity of the systematic risk factors on the performance of the
actions.
b. If the risk-free rate is 5%, formulate the required return equation.
c. Assuming that the expected market risk premium is 6.2%; the risk premium
expected size factor of 3.8%, the expected risk premium of the ratio factor
book value/market value, of -4.8% and the market portfolio premium is 2.9%,
calculate the expected return of pharmaceutical industry stocks.
d. Calculate the expected return of the pharmaceutical industry stocks according to the
CAPM and compare it with the results obtained in the previous section. (Suggestion: calculate
again the market beta with a simple regression

-----------------------------------------------------------------------------------------------------------------------------------
 FORMULAS

Total return rate

+ − -1
= −1

cash (fluxury) received from the investment in the asset during the period
= price (value) of the asset at time t
ɛ −1 price (value) of the asset at time t- 1

Dividend yield rate,

=
−1

Capital gain,

− −1
=
-1

Expected performance for different probabilities of occurrence, ̅

̅ =∑ ∗
=1

performance of the j-th result

probability of the j-th outcome occurring
= number of results considered

Standard deviation for different probabilities of occurrence.

2
= − ̅) ∗
√ ∑(
=1

Expected return with equal probability of occurrence, ̅

̅ = , óóAVERAGE
Standard deviation with equal probability of occurrence,
= DESVEST.M or DESVEST.P

Number of standard deviations from the mean,

− ̅
=

Coefficient of variation,

=
̅

Expected return of a portfolio with different weights,

=∑ ∗
A=1

proportion of the total portfolio value represented by asset j

return on asset j

Covariance between different probability of occurrence, ,

, (
=∑ 1− ) ̅ ∗( 1− )̅ ∗
=1

Correlation coefficient,

= , ó " . . "

Covariance ,

, = ∗ ∗

Variance/covariance matrix with two or more assets with the same probabilities over the
state of the economy or with historical data with equal probability of occurrence,

Data Analysis, "Analysis"

Variance of a portfolio calculated on the variance/covariance matrix,

= , ó "
= functionName(functionName(parameter1, "someString");English Text 2 "Translation"

/ "); ( " ")

Standard deviation of the portfolio composed of a risk-free asset and a risky asset,

= ∗
= ó
= ó á

Beta coefficient of an asset,

= , ó " "

Beta coefficient of portfolios,

=∑ ∗
=1

proportion of the total portfolio value represented by asset j

= coefbeta coefficient or undiversified risk indexfcable for asset j

Capital Asset Pricing Model (CAPM)

= +[ (
∗ − ) ]

required return of asset j

risk-free rate of return
= coefbeta coefficient or non-diversified risk indexfcable for asset j
market performance; performance of the market portfolio of assets
 SOLUTIONARY

8) a. Apple = rendimiento esperado = 18,25%. Desviación estándar = 5,97%

Cisco = rendimiento esperado = 17,85%. Desviación estándar = 4,44%
Hasbro = rendimiento esperado = 18%. Desviación estándar = 5,53%
[Link] esperado del portafolio = 18%. Desviación estándar = 1,66%
9) a. BNB = rendimiento esperado = 36,00%. Desviación estándar = 26,79%
Bitcoin = rendimiento esperado = 29,00%. Desviación estándar = 19,17%
Chilliz = rendimiento esperado = 37,00%. Desviación estándar = 24,65%
Ethereum = rendimiento esperado = 30,00%. Desviación estándar = 20,92%
Polygon = rendimiento esperado = 41,00%. Desviación estándar = 31,90%
Solana = rendimiento esperado = 37,20%. Desviación estándar = 28,18%
[Link] esperado del portafolio = 33,32%. Desviación estándar = 8,40%
19) Fuel price: 10.28% Tipo de cambio: 3,77%
22) Microsoſt: 0,52%; 6,20% Exxon Mobile: 0,61%; 7,35% General Electric: 0,66%; 7,95%
In[Link] + 0,85 − (+∈ ̅ )

AMD:11.8% + 1.25 units ( − ̅ )

+ ∈ Nvidia:14.9% + 0.9 ( −
̅ )+∈

[Link]: 12.13% AMD: 10.93% Nvidia: 14.55%

c.12.31%
24) a. 0.5343 ñ 0.1312 / = -0.2021
b. (
= 4% + 0.5343 * )+ 0.1312∗
( ñ )+ (−0.2021 * / )
c.9,40%
d.10.60%
25) a. = 0.5094 ñ 0.0568 / -0.1410 0.1921
b. = 5% + 0.5094
( * +) 0.0568∗
( ñ ) (−0.1410 *
+ ) + (0.1921 * )

c. 9.61%
d.10.67%
 BIBLIOGRAPHY

Berk, Jonathan & DeMarzo, Peter (2020). Corporate Finance. 5th ed. Pearson Education, United
Kingdom.

Berk, Jonathan and Demarzo, Peter (2008). Corporate Finance. 1st ed. Pearson Education, Mexico.

Block, Stanley B.; Hirt, Geoffrey A.; and Danielsen, Bartley R. (2013). Fundamentals of Management
Finance. 14th ed. McGraw-Hill/Interamericana Editors, Mexico.

Brealey, Richard A.; Myers, Stewart C.; y Allen, Franklin (2010).Principios de Finanzas Corporativas.
10th ed. McGraw-Hill/Interamericana Publishers, Mexico.

Court M., Eduardo (2012).Finanzas Corporatvas.2ª ed. Cengage Learning, Argentna.

Dumrauf, Guillermo L. (2010).Finanzas Corporatvassun enfoque latnoamericano.2ª ed.

Alfaomega Publishing Group Argentina, Buenos Aires.

Ehrhardt, Michael C. y Brigham, Eugene F. (2007).Finanzas Corporatvas.2ª ed. Cengage Learning

Editors, Mexico.

Gitman, Lawrence J. y Zuter, Chad J. (2012).Principios de Administración Financiera. 12ª ed.

Pearson Education, Mexico.

Ross, Stephen A.; Westerfield, Randolph W. and Jordan, Bradford D. (2010). Fundamentals of Finance
Corporative. 9th ed. McGraw-Hill/Interamericana Publishers, Mexico.

Ross, Stephen A.; Westerfield, Randolph W. y Jaffe, Jeffrey F. (2012).Finanzas Corporatvas.9ª ed.
McGraw-Hill/Interamericana Publishers, Mexico.

Van Horne, James C. y Wachowicz, John M. (2010).Fundamentos de Administración Financiera.

13th ed. Pearson Education, Mexico.