Characterizing Risk and Return


1.      Definition of risk
The returns of an asset can either be measured as either actual or expected. When the expected return varies from the actual return, a deviation occurs. Therefore, we can define risk as the potential variability between the actual and expected return (Cornett et al, 200).


2.      Sources of the market and firm-specific risks
Risk can either be diversifiable or non-diversifiable (Cornett et al, 200). If the risk is non-diversifiable, it is referred to as a systematic/ market or non-diversifiable risk.  The market risk which relates to individual risks and it is caused by the market factors such as inflation and political events. The effects of market volatility make the risk non-diversifiable.

The diversifiable risk is common to all assets in a portfolio. It is the risk of a portfolio, and it shows how risky an asset would be if held in a portfolio. It is caused by the firm- specific events such as workers strikes, law suits, changes in regulations and loss of the main account. The diversifiable risk is reduced by including a greater number of securities in a portfolio.

3. Coefficient of variation
Coefficient of variation measures the degree of risk per unit of return (Cornett et al, 200). It is computed as the ratio between standard deviation and mean.
   4. FedEx Corp stock
Percentage of return= (106.69-103.39)/103.39


 = 3.3/103.39



0.032


Dollar return or the dividend per share is computed as follows:
DPS=Dividends/Number of shares
DPS=0.35/300
DPS=0.0012
5. Risk and return relationship
The relationship between risk and return is a direct one as the higher the returns the higher the risk (Cornett et al, 200). The rankings below demonstrate the relationship more clearly.
Ranking
name
return
standard deviation
1
Idol staff
15%
35%
2
Rail Haul
12%
25%
3
Poker R-U
9%
20%
Totals

36%
80%









6. Calculate the coefficient of variation
Coefficient of variation will be the standard deviation divided by mean
=80/36
=2.2
7. Returns of a portfolio
The expected return of the portfolio is the weighted average of actual or possible returns (Cornett et al, 200). It is calculated as follows.

Actual return (Ra)
weights(w)
Expected return(Ra*w)
oracle
1.34%
30%
0.40%
Valero energy
7.96%
20%
1.59%
McDonald
0.88%
50%
0.44%
Total Return


2.43%





















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