09 Jul Financial Management assignment

We study the trade-off between risk and return following lecture note 7 and various online sources. Returns and volatility of actual stocks will be analyzed. At first, a financial assets expected returns are calculated. Next, we consider risk. For the investment risk, simple probability theory is used to compare earnings of different actual return. Risky stocks or so-called junk bonds are those which have a high chance of loss or a negative returns. To measure risk, the standard deviation method is often employed. See lecture note for the definition and explanation. For example, AAA- rated corporations bonds are considered to have a very low risk, but usually a low expected return.  

To reduce the risk of investing, investors often hold a diversified portfolio of assets including stocks, bonds, and commodities. In this way, risk may be lowered.   

1. Solve a numerical question. Assume that Targets manager believes that economic conditions during the coming year will be strong, typical, or weak, and thinks that the firm’s returns will have the probability distribution shown below. What is the expected return? What are the variance and standard deviation of the expected returns?

2. What is an exchange traded fund (ETF)? Choose two ETFs and get risk information from Yahoo Finance (click on Risk). What are the standard deviations for these two ETFs? Which of these ETFs is riskier?    

 Give acomplete answer: pick one other students answer andcheckit carefully,  andconfirmtheir results. In your comment, you must explain how you checked it.

For data, you can use Yahoo Finance, FRED, or other related websites. 

FRED (Federal Reserve Bank) website: 

Investopedia education on ETF