FIN 475 Spring 2014
Cases in Financial Management
Prepared For Dr. Haskins
By Kaylynn Burgess, Cody Jochim, and Richard Caldecott
February 20, 2014
1. The case gave a table that had the rate or return under certain conditions and from that we found the expected returns, standard deviations, and coefficients of variations for the assets. For the expected returns we took the probability and multiplied that by the rate of return for each type of economy, and then added them all up. To get standard deviation you must first calculate the variance. For that we took the rate of return minus expected return, squared that difference, multiplied that by the probability, and then ...view middle of the document...
The disadvantage of using the CV is when the expected return is close to zero, the coefficient of variation will approach infinity and is therefore sensitive to small changes in the expected return. Standard deviation is a statistical measurement of how far a variable quantity, such as the price of a stock, moves above or below its average value. The wider the range, which means the greater the standard deviation, the riskier an investment is considered to be. Games and Outplace have higher standard deviations and CVs than the market, but they also have higher expected returns. When there is higher risk then the return should be higher, and it is in this case.
An index fund is a collective investment scheme, that is usually made up of a mutual fund or exchange-traded fund, that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. So it would have a constant standard deviation and expected return regardless of how the market is.
2. Next we found the expected return on the portfolio which consisted of 50% of Games and 50% of Outplace. We multiplied the return of Outplace by 50%, multiplied the return of Games by 50%, and then added the products to get the expected return for that year. We did that for the remaining years as well. To find the variance of the portfolio we subtracted the market return from the expected return and squared it. Then to find the standard deviation we took the square root of the variance.
| Er | Standard Deviation |
2000 | 17% | 4% |
2001 | 13% | 19% |
2002 | -1.5% | .5% |
2003 | 2.5% | 17.5% |
2004 | 19.5% | 5.5% |
Average | 10.1% | 9.3% |
The portfolio return has had its ups and down during those five years. In 2002 it was at its lowest with a -1.5% return, but the market had a rate of return of -2% so the portfolio was doing better than the market. The average of the expected return for those years was 10.1% and that is a good return for our investors.
3. In this question the new statistics were beta and R2. To get the beta we took the expected return minus the risk free rate and divided that by the market expected rate minus the risk free rate. To get R2 we did a regression with the market and Outplace and then with the market and Games.
| Market | Games | Outplace |
Standard Deviation | 12.12% | 8.32% | 3.54% |
Beta | 1 | 1.75 | 1.5 |
CC | | 0.6188 | -0.6345 |
R2 | | 0.3829 | 0.4031 |
Beta measures the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta less than 1, means that the security’s price will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. R2 is a statistical measure that represents the percentage of a fund or security's...