Exam 10: Risk and Return: Lessons From Market History

Suppose you are the risk manager of a bank with a trading portfolio of $1 billion.You have just received the latest information about the portfolio allocations made by the trading branch of your bank,who tell you that the portfolio will earn a premium return of 23% over the risk free rate in one year.You have carried out an independent analysis,and find that the return on your portfolio over the next ten days is normally distributed with a mean of 0.77% and a standard deviation of 5%.Find the ten day 1% value at risk for this portfolio.

List 2 shortcomings of using value at risk (VaR)as a risk management tool.

The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%.What was the average risk premium you earned and your precise rate of return?

Capital market history shows us that the average return relationship between securities where:

The Alpha stock you bought for $26.75 a year ago is now selling for $32.50.Alpha also paid you $2.25 in dividends.What would your dollar return be from this stock?

The return on your portfolio over the last 5 years were -5%,20%,0%,10% and 5%.What was the standard deviation of your return? What is your best guess as to next year's return?

Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50.In addition,the stock paid dividends of $0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.

A capital gain occurs when:

A stock had returns of 8%,14%,and 2% for the past three years.Based on these returns,what is the probability that this stock will earn at least 20% in any one given year?

The expected return on a security in the market context is:

A stock had the following prices and dividends.What is the geometric average return on this stock?

The returns on your portfolio over the last 5 years were -5%,20%,0%,10% and 5%.What is the arithmetic average return?

The Zolo Co.just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share.If the stock price remains constant,then:

You have a sample of returns observations for the Malta Stock Fund.The 4 returns are 0.0725,0.056,0.125,0.010.What is the average return and variance of these returns?

You earned a total return of -5% on NoDotCom this year,earned -40% last year,and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.

The return pattern on your favorite stock has been 5%,8%,-12%,15%,21% over the last five years.What is your average return and total change in wealth per year over the period?

Last year you bought some Alpha stock for $26.75 a share.It is currently selling for $32.50.You received a dividend of $2.25 during the year.What is your total rate of return?

Six months ago,you purchased 100 shares of stock in ABC Co.at a price of $43.89 a share.ABC stock pays a quarterly dividend of $.10 a share.Today,you sold all of your shares for $45.13 per share.What is the total amount of your capital gains on this investment?

Explain why a financial manager of a large company should use the standard deviation as the measure of risk to determine the discount rate?

Excelsior shares are currently selling for $25.00 each.You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share.What was your percentage capital gain this year?