BIO 4090 – Characterizing Risk and Return Resources
Subject: Business / Finance
Characterizing Risk and ReturnResources
Characterizing Risk and Return Scoring Guide.
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.
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.
Proficient-level: “How do Cornett, Adair, and Nofsinger define risk in the M: Finance textbook and how is it measured?” (Cornett, Adair, & Nofsinger, 2016).
Distinguished-level: Describe the risk relationship between stocks, bonds, and T-bills, using the standard deviation of returns as the measure of risk.
Proficient-level: “What is the source of firm-specific risk? What is the source of market risk?” (Cornett, Adair, & Nofsinger, 2016, p. 233).
Distinguished-level: Identify which of the two types of risk can be reduced through diversification.
Proficient-level: “What does the coefficient of variation measure?” (Cornett, Adair, & Nofsinger, 2016, p. 233).
Distinguished-level: Explain why a lower coefficient of variation is better for an investor.
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 $106.69. If you owned 200 shares of FedEx, what was your dollar return and percent return?” (Cornett, Adair, & Nofsinger, 2016, p. 234).
Distinguished-level: Explain why a percentage return can be more useful than a dollar return.
Proficient-level: “Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent” (Cornett, Adair, & Nofsinger, 2016, p. 234).
Distinguished-level: Describe the components of the standard deviation formula.
Proficient-level: “Rank the following three stocks by their risk return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent” (Cornett, Adair, & Nofsinger, 2016, p. 234).
Before solving this problem, calculate the coefficient of variation.
Distinguished-level: Explain how the coefficient of variation acts as a trade-off between risk and return.
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 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDonald’s, what is your portfolio return?” (Cornett, Adair, & Nofsinger, 2016, p. 235).
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.
Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill.