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BUS3062-Fundamentals of Finance unit #4 (Example)

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BUS3062-Fundamentals of Finance unit #4 – Section #4 Student’s name: Institutional affiliation: Answer 1 Proficient The main reason is that it includes measures for estimations of risk measures for the future. The inherent nature of expected returns presents a challenge in that the metric is unpredictable since it is technically an estimate for the future CITATION MFi \l 1033 (Cornett Adair & Nofsinger 2016). Distinguished It is necessary in establishing all the possibilities for future returns. Answer of portfolio will be given by sum of (beta of each stock x its weight in the portfolio) Beta of portfolio = (2 * 30%) + (1 * 30%) + (0.25 *40%) Beta of portfolio = 1 Distinguished It has equal risk compared to the market since it has a beta of 1 CITATION MFi \l 1033 (Cornett Adair & Nofsinger 2016). Reference BIBLIOGRAPHY Cornett M. Adair T. & Nofsinger J. (2016). M: Finance. New York: McGraw-Hill. [...]

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BUS3062-Fundamentals of Finance unit #4 Please kindly do all section below; Section 1, 2, 3, AND 4 ARE DUE BY MARCH 6TH 2018 SECTION-#1U03D1-Beautiful Beta Review the Discussion Participation Scoring Guide. Chapter 10 in the M: Finance textbook by Cornett, Adair, and Nofsinger discusses aspects of both risk and return. Risk and return can be seen as two sides of the same coin. In other words, risk and return are inexorably intertwined. Beta is one measure of market risk. Review Chapter 10, with particular emphasis on the "Market Risk" section of this chapter. For this discussion post, address the following: • In your own words, what is the meaning of the terms beta and capital asset pricing model? • Select three stocks from the listing of the Dow Jones Industrial Average Stock Betas from Table 10.2 of the textbook. List these three stocks, along with their corresponding beta. Which one of the three stocks in your list is least risky? Why? Which one of the three stocks in your list is most risky? Why? • If the beta of a portfolio of stocks was calculated to be 1.0, how should your portfolio react to changes in the overall market? • If you assembled a mix of stocks for a financial portfolio for your personal use, would you prefer a low beta, a beta of 1.0, or a high beta? Why? U03D1 DISCUSSION FOR REPLY-SECTION-#2 Response Guidelines Read your peers' initial discussion posts and respond to at least two of them. Compare your post to those of your peers and note any differences. Explain why you agree or disagree with your peers' views and analyses. Your responses are expected to be substantive in nature and should reference the assigned readings or other professional literature, as applicable, to support your views. Resources • Discussion and Participation Scoring Guide. SECTION-#3 U04A1-Characterizing Risk and Return Introduction This assignment emphasizes the risk and return relationship. Every investment carries a different level of risk and return. In this assignment, you will learn about different measures of risk and how to compare risk with the return. In addition, you will differentiate between stand-alone risk and portfolio, or market, risk. Instructions Answer the following questions and complete the following problems, as applicable: You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas. Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. • Question 1: o Proficient-level: "How do Cornett, Adair, and Nofsinger define risk in the M: Finance textbook and how is it measured?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Describe the risk relationship between stocks, bonds, and T-bills, using the standard deviation of returns as the measure of risk. • Question 2: o Proficient-level: "What is the source of firm-specific risk? What is the source of market risk?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Identify which type of risk can be reduced through diversification. • Question 3: o Proficient-level: "What does the coefficient of variation measure?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Explain why a lower coefficient of variation is better for an investor. • Question 4: o Proficient-level: "FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $107.69. If you owned 100 shares of FedEx, what was your dollar return and percent return?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Explain why a percentage return can be more useful than a dollar return. • Question 5: o Proficient-level: "Rank the following three stocks by their level of total risk, highest to lowest. Baker Co. has an average return of 13 percent and standard deviation of 26 percent. The average return and standard deviation of Able Co. are 15 percent and 34 percent; and of Catco Co. are 9 percent and 19 percent." (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Describe the components of the standard deviation formula. • Question 6: o Proficient-level: "Rank the following three stocks by their risk-return relationship, best to worst. Baker Co. has an average return of 13 percent and standard deviation of 26 percent. The average return and standard deviation of Able Co. are 15 percent and 34 percent; and of Catco Co. are 9 percent and 19 percent." (Cornett, Adair, & Nofsinger, 2016).  Before solving this problem, calculate the coefficient of variation. Show the coefficient of variation you have calculated for each stock. o Distinguished-level: Explain how the coefficient of variation acts as a trade-off between risk and return. • Question 7: o Proficient-level: "Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio made up of 10 percent Oracle, 45 percent Valero Energy, and 45 percent McDonald's, what is your portfolio return?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Explain the role of weights in determining portfolio return. Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Characterizing Risk and Return Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work. Reference Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill. Resources • Characterizing Risk and Return Scoring Guide. [u04a2] Unit 4 Assignment 2 SECTION- #4 U04A2-Estimating Risk and Return Introduction In this assignment, you will learn how to calculate risk and return, and how to interpret the results. The focus of this assignment is the Capital Asset Pricing Model (CAPM). After completing the assignment, you will be able to apply the CAPM to any stock or portfolio valuation, understand the concept of the beta of a stock, and understand a portfolio. Instructions Answer the following questions and complete the following problems, as applicable: You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas. Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. • Question 1: o Proficient-level: "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Explain the role of probability distribution in determining expected return. • Question 2: o Proficient-level: "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired." (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Provide examples of a portfolio for someone who is very risk averse and for someone who is less risk averse. • Question 3: o Proficient-level: Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns." (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Recalculate the expected return under a set of changed economic probabilities. • Question 4: o Proficient-level: "If the risk-free rate is 2 percent and the risk premium is 7 percent, what is the required return?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Identify which financial security's return is typically considered the risk-free rate. • Question 5: o Proficient-level: "The average annual return on a broad market index over a ten year period was 13.5 percent. The average annual T-bill yield during the same period was 2.5 percent. What was the market risk premium during these 10 years?" (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: Define, in your own words, the term, market risk premium. • Question 6: o Proficient-level: "Hastings Entertainment has a beta of 0.75. If the market return is expected to be 12 percent and the risk-free rate is 3 percent, what is Hastings' required return?" (Cornett, Adair, & Nofsinger, 2016).  Use the capital asset pricing model to calculate Hastings' required return. o Distinguished-level: Recalculate the required return with a change to beta, and explain the effect of a 1.0 increase in beta on the subsequent amount of change in the required return. • Question 7: o Proficient-level: "Calculate the beta of a portfolio comprised of the following items: (a) Rigid Steel stock, which has a beta of 2.0 and comprises 30 percent of your portfolio, (b) Vega Inc. stock, which has a beta of 1.0 and comprises 30 percent of your portfolio, and (c) Polaris Electric stock, which has a beta of 0.25 and comprises 40 percent of your portfolio." (Cornett, Adair, & Nofsinger, 2016). o Distinguished-level: State whether this portfolio has less risk, equal risk, or more risk, compared to the overall market. Economic State Probability Return Fast Growth 0.25 40% Slow Growth 0.50 10% Recession 0.25 −4% Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Estimating Risk and Return Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work. Reference Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill. Resources • Estimating Risk and Return Scoring Guide.

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