## More Risk and Return Practice Problems

Created by Pamela Peterson Drake
- Consider the following investments. Which investment would a risk
averse investor prefer?:
- Investment A: Expected return = 11%, Standard deviation = 12%
- Investment B: Expected return = 10%, Standard deviation = 10%
- Investment C: Expected return = 11%, Standard deviation = 10%
- Investment D: Expected return = 11%, Standard deviation = 11%

- Joe Investor has invested in three securities: A, B, and C. What is
the beta of his portfolio, considering the
amount invested in each security and the individual security betas?
- Security A: Invested $30,000, beta of 1.50
- Security B: Invested $20,000, beta of 2.00
- Security C: Invested $20,000, beta of 0.50

- Consider Joe Investor once again (the previous problem). If he had
invested $100,000 in Security C (instead of $20,000), with all other
investments the same, what is Joe's portfolio beta?

- An analyst has provided information on possible returns (and their
likelihood of occurring) for the Icahn Trust Corporation stock. What is
the standard deviation of the expected returns for this stock, given the
following distribution?
- Scenario 1: probability = 20%, return = -40%
- Scenario 2: probability = 50%, return = 0%
- Scenario 3: probability = 30%, return = 30%

- Calculate the expected dollar return and the standard deviation of
these possible returns for the Pizza Palace, given the following possible
returns:
Scenario | Probability |
Possible return |

Success | 20% |
+$50 |

Normal | 50% |
+$10 |

Bomb | 30% |
-$10 |

Solutions