# Estimating risk and return

Suggested resources:

Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.

Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.

Questions:

In a Word document, respond to the following. Number your responses 12.

1. Explain why expected return is considered forward-looking. What challenges arise in using expected return?

2. Explain how differences in allocations between the risk-free security and the market portfolio can determine the level of market risk.

Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.

Problems:

In either a Word document or Excel spreadsheet, complete the following problems.

1. Based on the probability and percentage of return for the three economic states in the table below, compute the expected return.

2. If the risk-free rate is 7 percent and the risk premium is 4 percent, what is the required return?

3. Suppose that the average annual return on the Standard and Poors 500 Index from 1969 to 2005 was 14.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years?

4. Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomcos required return? Use the capital asset pricing model (CAPM) to calculate Conglomcos required return.

5. Calculate the beta of a portfolio that includes the following stocks:

-Conglomco stock, which has a beta of 3.9 and comprises 35 percent of the portfolio.

-Supercorp stock, which has a beta of 1.7 and comprises 25 percent of the portfolio.

-Megaorg stock, which has a beta of 0.3 and comprises 40 percent of the portfolio.