Questions In A Word Document Respond To The Following Number

Questions in a Word Document Respond To The Following Number Your Res

Questions in a Word document, respond to the following. Number your responses 1–3. Define risk, and explain how it is measured. Identify a source of firm-specific risk. What is the source of market risk? Explain what the coefficient of variation measures. Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.

Problems in either a Word document or Excel spreadsheet, complete the following problems. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

Two years ago, Conglomco stock ended at $73.02 per share. Last year, the stock paid a $0.34 per share dividend. Conglomco stock ended last year at $77.24. If you owned 200 shares of Conglomco stock, what were your dollar return and percent return last year? Calculate the coefficient of variation for the following three stocks. Then rank them by their level of total risk, from highest to lowest: Conglomco has an average return of 11 percent and standard deviation of 24 percent. Supercorp has an average return of 16 percent and standard deviation of 37 percent. Megaorg has an average return of 10 percent and standard deviation of 29 percent. Year-to-date, Conglomco has earned a −1.64 percent return, Supercorp has earned a 5.69 percent return, and Megaorg has earned a 0.23 percent return. If your portfolio is made up of 40 percent Conglomco stock, 30 percent Supercorp stock, and 30 percent Megaorg stock, what is your portfolio return?

Paper For Above instruction

1. Definition and Measurement of Risk

Risk in finance refers to the uncertainty or variability of returns associated with an investment. It reflects the possibility that actual returns will differ from expected returns, leading to potential financial loss. Risk is typically measured using statistical methods, primarily through standard deviation and variance. Standard deviation quantifies the dispersion of returns around the mean, giving investors an idea of the volatility and potential fluctuations in investment returns (Bodie, Kane, & Marcus, 2014). Variance, which is the square of standard deviation, also measures dispersion but in squared units. Both metrics help investors assess the level of uncertainty inherent in different investment options, providing a basis for risk management and portfolio diversification (Fabozzi & Markowitz, 2011).

2. Sources of Risk

Firm-specific risk, also called unsystematic risk, arises from factors unique to a particular company that can affect its stock price independently of the broader market. An example of a firm-specific risk source is management performance; poor decision-making or scandals can negatively impact a company's stock value regardless of overall market conditions (Ross, Westerfield, & Jaffe, 2013). On the other hand, market risk, also called systematic risk, originates from macroeconomic factors affecting the entire market or economy. Common sources include interest rate fluctuations, inflation, political instability, or economic recessions, which influence almost all securities and are uncontrollable through diversification (Markowitz, 1952).

3. Coefficient of Variation and Its Implication

The coefficient of variation (CV) measures relative risk by expressing the standard deviation as a proportion of the mean return. It is calculated by dividing the standard deviation by the average return and is particularly useful for comparing the risk per unit of return across different investments (He, 2012). A lower CV indicates a more favorable risk-return trade-off, meaning the investment provides more return per unit of risk. Conversely, a higher CV suggests higher relative risk, which might be less attractive unless compensated with higher returns (Elton & Gruber, 1995). Thus, CV helps investors compare investments with different return profiles and identify the most efficient risks.

Responses to Financial Calculation Problems

1. Conglomco Stock Return Calculation

To compute the dollar return, we consider the change in stock price plus dividends. The initial value of 200 shares two years ago at $73.02 per share was:

Initial Investment = 200 shares × $73.02 = $14,604

Dividend received last year = 200 shares × $0.34 = $68

Ending stock value last year = 200 shares × $77.24 = $15,448

Dollar return = (Ending value + Dividends) - Initial investment = ($15,448 + $68) - $14,604 = $912

Percent return = (Dollar return / Initial value) × 100 = ($912 / $14,604) × 100 ≈ 6.25%

This means the investment yielded approximately 6.25% in return last year.

2. Coefficient of Variation for the Stocks

Coefficient of Variation (CV) = Standard deviation / Average return

For Conglomco: CV = 24% / 11% = 2.18

For Supercorp: CV = 37% / 16% = 2.31

For Megaorg: CV = 29% / 10% = 2.90

Ranking by total risk (highest to lowest): Megaorg (2.90), Supercorp (2.31), Conglomco (2.18)

3. Portfolio Return Calculation

The portfolio return is the weighted sum of individual stock returns:

Portfolio Return = (Weight_Conglomco × Return_Conglomco) + (Weight_Supercorp × Return_Supercorp) + (Weight_Megaorg × Return_Megaorg)

= (0.40 × -1.64%) + (0.30 × 5.69%) + (0.30 × 0.23%)

= (-0.656%) + (1.707%) + (0.069%) = approximately 1.12%

The portfolio has earned an estimated return of approximately 1.12% year-to-date.

References

  • Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.
  • Elton, E. J., & Gruber, M. J. (1995). Modern Portfolio Theory and Investment Analysis. Wiley.
  • Fabozzi, F. J., & Markowitz, H. M. (2011). The Theory and Practice of Investment Management. Wiley.
  • He, Q. (2012). Financial Risk Management: Practical Methods for Banks and Financial Institutions. Wiley.
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.

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