Question

1. calculate the standard deviation for the following returns: -10, 10, 13, -4, 5

2. a stock has an expected return of 13.5%, its beta is 1.17 and the risk-free rate is 5.5%. what must the expected return on the market be?

3. Systematic Risk is fully diversifiable (T/F)

Answer 1

1. Expected return =( -10+10+13-4+5)/5

= 2.80%

Standard Deviation = 9.63%

Answer : 9.63%

Note:

Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared
-10	-12.8	0.016384
10	7.2	0.005184
13	10.2	0.010404
-4	-6.8	0.004624
5	2.2	0.000484
	Sum of Deviation Squared	0.03708
	Variance = Sum of Deviation Squared / (Time -1)	0.00927
	Standard Deviation = Variance ^(1/2)	9.63 %

2. Expected return = Risk free rate + (Expected return on market - risk free rate) *beta

13.5% = 5.5% + (Expected return on market - 5.5%) * 1.17

13.5% -5.5% = 1.17 * Expected return on market - 6.435

Expected return on market = 12.34%

Answer : 12.34%

3. Answer : False

Note: The Systematic Risk cannot be diversified as it is the risk associated with the market as a whole. It doesnot pertain to any particular stock and hence cannot be diversified.