Question 9.RQ.22: The probability distribution of expected future returns are ......

Management Accounting and Financial Analysis for CA Final Examination [995093]

The probability distribution of expected future returns are as follows:
$\,$ Compute the (a) standard deviation of expected returns of each share, (b) coefficient of variation. Which share is more risky? Why?

$Return\>on\>shares\>(percentage)$		$Probability$ $\,$
$Y$	$X$	$Probability$ $\,$
(18)	(16)	0.1
12	2	0.2
18	8	0.4
32	12	0.2
40	20	0.1

Step-by-Step

The 'Blue Check Mark' means that this solution was answered by an expert.
Learn more on how do we answer questions.

(b) Coefficient of variation:
$\,$ Share X = 8.94/6.4 = 1.4
$\,$ Share Y = 14.98/18.2 = 0.82
$\,$ Share X is more risky since it has larger coefficient of variation (a
$\,$ measure of relative risk).

(a) $Computation\> of \>standard\> deviation\> of\> shares,\> X\> and \>Y$

$(r_i - r)^2P_i$ (%) (6)	$(r_i - r)^2$ (5)	$(r_i - r)$ (%) (4)	$r_iP_i$ (%) (3)	$P_i$ (2)	$r_i$ (%) (1)
Share X :
50.2	501.8	(22.4)	(1.6)	0.1	(16)
3.9	19.4	(4.4)	0.4	0.2	2
1.0	2.6	1.6	3.2	0.4	8
6.3	31.4	5.6	2.4	0.2	12
18.5	185.0	13.6	2	0.1	20
σ² = 79.9			$\bar{X}=6.4$
$\,$ Since σ² = 79.9, σ = $\sqrt{79.9}$ = 8.94 per cent
Share Y :
131.04	1,310.4	(36.2)	(1.8)	0.1	(18)
7.68	38.4	(6.2)	2.4	0.2	12
0.02	0.04	(0.2)	7.2	0.4	18
38.08	190.4	13.8	6.4	0.2	32
47.52	475.2	21.8	4	0.1	40
σ² = 224.34			$\bar{X}=18.2$
$\,$ Since σ² = 224.34, σ = $\sqrt{ 224.34}$ = 14.98 per cent

Related Answered Questions

Question: 9.4

Determine optimal weights, at zero correlation, for the data provided in Example 9.3. Optimal weights are: ...

Verified Answer:

Optimal weights are:

\qquad\,w^*_L = [(20)^...

Question: 9.3

Let us assume that standard deviations of assets L and H, considered earlier, are 16 and 20 per cents respectively. If the coefficient of correlation between their returns is 0.6 and the two assets are combined in the ratio of 3:1, the expected return of the portfolio is determined as follows: ...

Verified Answer:

If the coefficient of correlation between their re...

Question: 9.PP.18

Rashid Jitani, a renowned leading investment manager, has identified two shares East and West and the perfect negative correlation between their returns. From the characteristics of these shares determine the risk-free rate. What inference do you draw from your results? ...

Verified Answer:

The risk-free rate is one that corresponds to zero...

Question: 9.RQ.24

The rate on T-bills (risk-free return, rf) is currently 7.75 per cent, while the expected market return (rm) is 14.25 per cent. Compute the required rate of return of each security listed below: ...

Verified Answer:

Question: 9.RQ.23

The expected return (r) and standard deviation (σ) of shares of X Ltd and Y Ltd are: ...

Verified Answer:

(a)

\rho_{xy}

= 0.1

\, [/lat...

Question: 9.RQ.27

Given the following information about the market rm = 18 per cent, rf = 6per cent, σm = 30 per cent. (a) Calculate the slope of the capital market line (CML). (b) Calculate the expected return for three mutual funds, namely, Aries (σ = 15 per cent), Taurus (β = 18 per cent), Gemini (σ = 24 per ...

Verified Answer:

(a) Slope of CML

= r_m – r_f /\sigma_m =[/l...

Question: 9.RQ.26

The following facts are available: rm = 0.14 rf = 0.0825 r = 0.18 Compute the beta coefficient (β). ...

Verified Answer:

\qquad r = r_f + \beta (r_m – r_f)

...

Question: 9.RQ.25

Assume the following facts: Risk-free return, rf , 7.75 per cent Beta, 2 Expected return of investors, r, 16 per cent Applying CAPM, compute the expected market return (rm). ...

Verified Answer:

\qquad \> r = r_f + \beta (r_m – r_f)[/l...

Question: 9.RQ.21

The following facts are available: • Risk-free rate, 9 per cent • Required rate of return on market portfolio, 18 per cent • Beta coefficient of the shares of ABC Ltd, 1.5 • Expected dividend during the next year, Rs 3 • Growth rate in dividends/earnings, 8 per cent ...

Verified Answer:

P_o = D_1/(r - g) =

Rs 3/(0.225 – 0...

Question: 9.RQ.20

The total market value of the equity share of ORE Company is Rs 60,00,000 and the total value of the debt is Rs 40,00,000. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 10 per cent. The treasury bill rate is 8 per cent. ...

Verified Answer:

(i) Beta of existing portfolio of assets

(b...