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FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

Question

Apex Enterprises has a mixture of investment portfolios, Stock A and Stock B. The historical performance return on the stocks are as follows:

Year	Stock A Return	Stock B Return
20X5	-10%	-3%
20X6	18%	21%
20X7	39%	44%
20X8	14%	4%
20X9	33%	28%

Required:
(a) Calculate the average rate of return for each stock during the period of 20X5 to 20X9.

(b) Calculate the average return on the portfolio during the period if Apex Enterprises held 50% each of Stock A and Stock B.

Answer

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Tags: Financial management, Investment Analysis, Portfolio theory, risk analysis, Standard deviation
Level: Level 2

Topic: Portfolio theory and the capital asset pricing model (CAPM)

FM – L2 – Q25 – Portfolio theory and the capital asset pricing model (CAPM)

Calculate expected return and risk for two projects and advise on investment choice based on risk-return tradeoff.

Question

Regal Enterprises Ltd. has a mixture of investment portfolios, Project 3 and Project 4. The historical performance return on the projects are as follows:

	Return	Probability
Project 3	6.0	0.6
	1.0	0.4
Project 4	8.0	0.5
	-1.0	0.5

Required:
(a) Calculate the expected return and standard deviation for Project 3 and Project 4. (6 marks)
(b) The divisional manager will invest in projects that are more risky if they offer a higher return. Advise which project the manager will invest in, considering the expected returns of Project 1 (3.6) and Project 2 (3.95).

Answer

Find Related Questions by Tags, levels, etc.

Tags: CAPM, expected return, Investment decisions, Portfolio theory, risk analysis, Standard deviation
Level: Level 2

Topic: Portfolio theory and the capital asset pricing model (CAPM)

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FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

FM – L2 – Q25 – Portfolio theory and the capital asset pricing model (CAPM)

Calculate expected return and risk for two projects and advise on investment choice based on risk-return tradeoff.

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FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

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FM – L2 – Q25 – Portfolio theory and the capital asset pricing model (CAPM)

Calculate expected return and risk for two projects and advise on investment choice based on risk-return tradeoff.

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