Chapter 7 - Risk & Return

Question 1

How do you calculate the required return of equity by shareholders?

Answer 1

Required return = Risk free premium+ß*Market risk premium

Market risk premium = risk free premium - expected market return

Question 2

How do you calculate the risk of an asset?

Answer 2

pk = probability * expected return

k^2 = expected return squared

pk^2 = probability * expected return squared

the sums of pk and pk^2 is found

Var(e) = pk^2 - pk * pk

Risk = square root of var(e)

Question 3

How do you calculate the expected return and variance of a portfolio of two assets?

Answer 3

Return:
E(R) = xaE(Ra)+xbE(Rb)

Variance:

Var(R) = xa^2 * deviation of a^2 + xb^2 * deviation of b^2 +2xaxbpabdeviation of a*deviation of b