Price in pesos Pesos per dollar 20. 50 9. 21 $2. 22584 1,000 shares $2,225. 84 Price in pesos Pesos per dollar 24. 75 $2. 51269 1,000 shares $2,512. 69 9. 85 286. 85 2,225. 84 0. 12887 12. 89% c. Returnpesos 2,512. 69 2,225. 84 2,225. 84 d. The two returns differ due to the change in the exchange rate between the peso and the dollar. The peso had depreciation (and thus the dollar appreciated) between the purchase date and the sale date, causing a decrease in total return. The answer in part c is the more important of the two returns for Joe. An investor in foreign securities will carry exchange-rate risk. P8-17.
Total, nondiversifiable, and diversifiable risk LG 5; Intermediate a. and b. c. Only nondiversifiable risk is relevant because, as shown by the graph, diversifiable risk can be virtually eliminated through holding a portfolio of at least 20 securities that are not positively correlated. David Talbot’s portfolio, assuming diversifiable risk could no longer be reduced by additions to the portfolio, has 6. 47% relevant risk. P8-18. Graphic derivation of beta LG 5; Intermediate a. b. To estimate beta, the ? rise over run? method can be used: Beta Rise Run Y X c. Taking the points shown on the graph: Y 12 9 3 Beta A 0. 5 X 8 4 4 Y 26 22 4 Beta B 1. 33 X 13 10 3 A financial calculator with statistical functions can be used to perform linear regression analysis. The beta (slope) of line A is 0. 79; of line B, 1. 379. With a higher beta of 1. 33, Asset B is more risky. Its return will move 1. 33 times for each one point the market moves. Asset A’s return will move at a lower rate, as indicated by its beta coefficient of 0. 75. P8-19. Graphical derivation and interpretation of beta LG 5; Intermediate a. With a return range from 60% to 60%, Biotech Cures, exhibited in Panel B, is the more risky stock.
The concept of risk is intuitively understood by investors. In general, it refers to the possibility of incurring a loss in a financial transaction. But risk involves much more than that. The word ‘risk’ has a definite financial meaning. The possibility of variation of the actual return from the expected return is termed risk. Corporate securities and government securities constitute important ...
Returns are widely dispersed in this return range regardless of market conditions. By comparison, the returns of Panel A’s Cyclical Industries Incorporated only range from about 40% to 40%. There is less dispersion of returns within this return range. b. The returns on Cyclical Industries Incorporated’s stock are more closely correlated with the market’s performance. Hence, most of Cyclical Industries’ returns fit around the upward sloping least-squares regression line. By comparison, Biotech Cures has earned returns approaching 60% during a period when the overall market experienced a loss.
Even if the market is up, Biotech Cures has lost almost half of its value in some years. c. On a standalone basis, Biotech Cures Corporation is riskier. However, if an investor was seeking to diversify the risk of their current portfolio, the unique, nonsystematic performance of Biotech Cures Corporation makes it a good addition. Other considerations would be the mean return for both (here Cyclical Industries has a higher return when the overall market return is zero), expectations regarding the overall market performance, and level to which one can use historic returns to accurately forecast stock price behavior.
When investor risk aversion declines, investors require lower returns for any given risk level (beta).
P8-31. Ethics problem LG 1; Intermediate Investors expect managers to take risks with their money, so it is clearly not unethical for managers to make risky investments with other people’s money. However, managers have a duty to communicate truthfully with investors about the risk that they are taking. Portfolio managers should not take risks that they do not expect to generate returns sufficient to compensate investors for the return variability.
The Initiative for Policy Dialogue Corporate Governance Task Force Meeting September 25, 2003 Columbia University New York, NY Notes taken by Tomasz Michalski. Bolton: What is corporate governance? This is what I picked up from the NYT on Monday. It's not very encouraging for us. (shows slide) Here's our attempt to organize a few thoughts. What are the key issues for corporate governance in ...