You are considering the riskreturn profile of two mutual fu.pdf

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The document compares the risk and return profiles of two mutual funds. The riskier fund has an expected return of 9.2% and standard deviation of 15.3%, while the less risky fund has an expected return of 6% and standard deviation of 7.5%. It asks to calculate the probability of negative and above 11% returns for each fund and identify the fund that minimizes/maximizes each probability based on a normal distribution assumption.

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Question 1 Risk & Return and the CAPM. Based on the following information, calculate the required return based on the CAPM: Risk Free Rate = 3.5% Market Return =10% Beta = 1.08 Question 2 Risk and Return, Coefficient of Variation Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship. Std Dev.Exp. Return Company A 7.4 13.2 Company B 11.6 18.9 Question 3 Risk and Return, Coefficient of Variation Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship. Std Dev.Exp. Return Company A 10.4 15.2 · Company B 14.6 22.9 Question 4 Measures of Risk. Address each source of risk that is measured and relate it to two models addressed in this unit. · Your response should be at least 250 words in length. BBA 3301, Financial Management 1 UNIT VI STUDY GUIDE Risk and Return Learning Objectives Upon completion of this unit, students should be able to: 1. Explain the risk-reward relationship. 2. Calculate holding period returns. 3. Calculate required returns using the Capital Asset Pricing Model (CAPM). 4. Calculate the coefficient of variation for varying investments. 5. Decompose sources of risk. 6. Contrast measures of risk. 7. Describe portfolio theory and diversification. Written Lecture Whenever a business or individual makes an investment decision, risk must be considered. This unit focuses entirely on the risk-return relationship, providing tools for measurement, analysis and decision making. To begin, the term risk must be defined. From a practical or applied perspective, risk is the probability of losing some or all of the money invested. In finance, risk is often associated with volatility of variance in returns (around some average return). Generally, it is assumed that investments that offer higher returns involve greater risk. For purposes of this unit, risk is measured through two primary measures:  Standard Deviation, and  The Beta Coefficient The rate of return allows an investment's return to be compared with other investments. For one-year investments, the return on a debt investment is:  k = interest paid / loan amount The return on a stock investment is calculated by the following equation k = [D1 + (P1 – P0)] / P0 Where: D1 = Dividends for the “next” year (on a share of stock) P1= Price of a share of stock, one period into the future P0= Price of a share of stock today The expected return on stock is the return investors feel is most likely to occur based on current information. Return is influenced by the combination of stock price (capita ...

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Deliverable 4 - Creating Contracts to Avoid Moral Hazard Competency Demonstrate how economic theory contributes to strategic managerial decision-making. Course Scenario Oil Company X is a large oil refinery which has been expanding and taking on new investment projects. Recently, they have considered building a pipeline that stretches across the United States, from Canada to New Orleans. The Board is in the process of hiring a new CEO for the firm. They are concerned about the problem of moral hazard and want to know how they can reduce or eliminate this via contract. They have tasked you, a team member in the Cost Department, with analyzing the following possible payment systems for the new CEO: 1. Fixed fee: The new CEO will receive a fixed wage. 2. Profit sharing: The new CEO receives 15% of the firm's profit, with no wage. The current value of the firm's profit, multiplied times 0.15, is equivalent to the fixed fee wage in option 1. 3. Stock Options: The new CEO receives a base salary, with additional stock options tied to total profits. The base salary is 10% lower than the fixed fee from option 1, with the additional 10% given in stocks. 4. Bonuses: The new CEO receives a base salary, with an additional stock bonus which is tied to total revenues. The base salary is 10% lower than the fixed fee from option 1, with the additional 10% given as a bonus tied to the total revenue from the prior year. 5. Stock Options and Bonus: The new CEO receives a base salary, with additional stock options tied to total profits. The base salary is 10% lower than the fixed fee from option 1, with an additional 5% given in stocks and 5% given in the form of a bonus. Instructions You will create a presentation detailing the pros and cons of each potential payment system, including a final recommendation. Be sure to explain whether the firm or the CEO will bear all risk, or if they split the risk with each contract. Record a presentation as if explaining this to the Board. There are many free screen recording software/Webware options available (such as Screencast-O- Matic) to use in presenting your PowerPoint. Make sure that both your voiced narration and the PowerPoint slides are captured during your screen recording. After recording, paste a link to the recording on the last slide of the PowerPoint presentation. You will submit the PowerPoint in the Drop Box. Format your PowerPoint to include a title page, introduction, body slides, conclusion, and references. Remember to cite your sources using correct APA format, and also use correct grammar, spelling, and formatting. Grading Rubric F F C B A 0 1 2 3 4 Not Submitted No Pass Competence Proficiency Mastery Not Submitted Introduction and/or conclusion did not summarize a well- justified recommendation. Introduction and/or conclusion did summarize a well- justified recommendation. Introduction and/or conclusion did summarize .

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