FINM2401 Financial Management Tutorial Questions - Tutorial 8 Pricing Risk 10-6. Using the data in the following table, calculate the return for investing in Boeing stock (BA) from January 2, 2008, to January 2, 2009, and also from January 3, 2011, to January 3, 2012, assuming all dividends are reinvested in the stock immediately. Historical Stock and Dividend Data for Boeing Date 1/2/2008 86.62 2/6/2008 79.91 5/7/2008 8/6/2008 65.40 11/5/2008 1/2/2009 Price 84.55 49.55 45.25 Dividend 0.40 0.40 0.40 0.40 Date 1/3/2011 2/9/2011 5/11/2011 8/10/2011 11/8/2011 1/3/2012 Price 66.40 72.63 0.42 79.08 0.42 57.41 66.65 74.22 Dividend 0.42 0.42 10-7. The last four years of returns for a stock are as follows: Year 1 2 3 Return -4.3% +27.7% +12.1% a. What is the average annual return? b. What is the variance of the stock's returns? c. What is the standard deviation of the stock's returns? 4 +4.3% 10-20. Consider two local banks. Bank A has 76 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 6% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $76 million outstanding, which it also expects will be repaid today. It also has a 6% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why? 10-21. Using the data in Problem 20, calculate a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. 10-22. Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together-in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent-one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain. 10-23. Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 70% probability that the firms will have a 7% return and a 30% probability that the firms will have a -18% 1 ... --
FINM2401 Financial Management return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 35 firms of (a) type S, and (b) type I? 10-25. Explain why the risk premium of a stock does not depend on its diversifiable risk. Investors can costlessly remove diversifiable risk from their portfolio by diversifying. They, therefore, do not demand a risk premium for it. 10-26. Identify each of the following risks as most likely to be systematic risk or diversifiable risk: a. The risk that your main