INVESTMENT MANAGEMENT (WIUC)

Practice Questions Set 1 (Risk and return sept 8 2022)

1. An investor purchased 100 shares of common stock at Ghc20 per share one year ago. The
company declared and paid a dividend of Ghc2 per share during the year. The investor
sold the stock for Ghc21 per share after the one year holding period.
a. Calculate the cedi return from this investment.
b. Calculate the HPR for this investment.
c. Partition the HPR into its dividend and capital appreciation components.

2. Consider the following ex-post HPRs:

Year Investment A (%) Investment B (%)

1 10 14
2 15 -10
3 8 30
a. Calculate the arithmetic mean HPR for each investment
b. Calculate the geometric mean HPR for each investment
c. Explain why the arithmetic and geometric means are different

3. Based on the scenario below, what is the expected return for a portfolio with the
following return profile?

Market Condition
Bear Normal Bull
Probability 0.2 0.3 0.5
Rate of return -25% 10% 24%

4. Consider the following subjective probability distribution for a potential investment:

State of the economy probability Estimated rate of return

Strong growth .1 25%
Moderate growth .4 15
Weak growth .4 10
Recession .1 -12

a. Calculate the expected rate of return

b. Calculate the variance
c. Calculate the standard deviation
d. Calculate the coefficient of variation
e. Interpret your answers in a-d
5. Consider the following risk and return measures for four firms:
Average Return Standard Deviation
Cal Bank 10% 14%
Eco Bank 8 12
MTN Gh Ltd 12 30
SIC Insurance 7 14
Rank- Order the firm (best to worst) by their risk and return attractiveness using the
coefficient of variation.

6. Assume the rate of return given below are for two stocks listed on the Ghana
Stock Exchange (GSE).
Year Return on stock A Return on stock B
1 0.2 0.3
2 0.10 0.1
3 0.14 0.18
4 0.05 0.00
5 0.01 -0.08

a. Calculate the arithmetic average return on the two stocks over the 5-year
period.
b. Which of the two stocks has a greater dispersion around the mean?
c. Calculate the geometric average returns of each stock.

7. Calculate the expected return based on the information below

State of economy Probability of state of Rate of return if state

economy occurs
Recession .3 .02
Boom .7 .23

8. Calculate the expected return based on the information in the table below

State of economy Probability of state of Rate of return if state

economy occurs
Recession .30 -.07
Normal .60 .13
Boom .10 .23

9. A stock was purchased for Ghc40 per share and sold for Ghc50 per share one year later.
In the course of the year the company paid a dividend of Ghc2 per share.
a. Calculate the return on the investment
b. Calculate the dividend yield on the investment
c. Calculate the capital gains yield on the investment