Running head: UNIT 4 ASSIGNMENT 1
Fundamentals of Finance
Unit 4 Assignment 1
1. Q: 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.
Answer Proficient-level: Risk is defined as the volatility of an asset’s returns over time. Specifically, the standard deviation of returns is used to measure risk. This computation measures the deviation from the ...view middle of the document...
3. Q: 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.
Answer Proficient-level: The coefficient of variation measures the amount of risk taken for each one percent of return achieved. It is computed by dividing the standard deviation of return by the total return. Investors would prefer to achieve a high return with little risk. In other words, they would like a high return with little standard deviation. This is realized in the coefficient of variation measure by a lower number.
Answer Distinguished-level: In the investing world, the coefficient of variation allows you to determine how much volatility (risk) you are assuming in comparison to the amount of return you can expect from your investment. Simply put, the lower the ratio of standard deviation to mean return, the better your risk-return tradeoff.
4. Q: 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.
Answer Proficient-level: Dollar Return $660 = 200 x ($106.69 – $103.39) + 0 and the Percent Return 3.19% = $660 / (200 x $103.39)
Answer Distinguished-level: Investors usually find it more useful to characterize investment earnings as percentage returns so that they can easily compare one investment’s return to other alternatives’ returns.
5. Q: 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.
Answer Proficient-level: Idol Staff, Rail Haul, and then Poker-R-Us
Answer Distinguished-level: Standard deviation is a measure of past return volatility, or risk, of an investment. Standard...