Solutions to More Risk and Return Practice Problems

  1. Consider the following investments. Which investment would a risk averse investor prefer?:

  2. 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?

  3. 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?

  4. 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?

    p x return p x (return - Expected return)2
    -0.08 0.03360
    0.00 0.00005
    0.09 0.02520
    0.01 0.0589

  5. 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 dollar return
    Success 20% +$50
    Normal 50% +$10
    Bomb 30% -$10