China Development Industrial Bank

Dibuat Oleh :
1. Rahadian Assaf
2. Febri Hartini Rahmawati
3. Irma Wulandriani Sigalingging
 A. 1.i. Why is the T-Bill’s return independent of the state of the economy?
1.ii Do T-Bills promise a completely risk-free return?

Answer :
1. Yes, it is stable on 5.5% for every economy condition.
1.ii No, T-Bills are still exposed to the risk of inflation. It is likely to occur relatively short
period .

State of the
Probability T-Bills
Economy

Recession 0.10 5.5%

Below
0.20 5.5%
Average
Average 0.40 5.5%
Above
0.20 5.5%
Average
Boom 0.10 5.5%

ȓ 5.5%
A.2 Why are the High Tech’s returns expected to move with the economy,
whereas Collections’ are expected to move counter to the economy?

Answer :

Positive Correlation Negative Correlation

State of the State of the

High Tech Collections
Economy Economy

Recession -27.0% Recession 27.0%

Below Below
-7.0% 13.0%
Average Average
Average 15.0% Average 0.0%
Above Above
30.0% -11.0%
Average Average
Boom 45.0% Boom -21.0%

ȓ 12.4% ȓ 1.0%
B. Calculate the Rate of Return ?

Expected Return is the rate of return expected to be realized

from an investment; the weighted average of the probability
distribution of the possible results.

∑Pr
Expected Rate
of Return = ȓ = i i

i=1
 Return on Alternatives Investments

State of the U.S Market 2-Stock

Probability T-Bills High Tech Collections
Economy Rubber Portofolio Portofolio

Recession 0.10 5.5% -27.0% 27.0% 6.0% -17.0% 0.0%

Below
0.20 5.5% -7.0% 13.0% -14.0% -3.0% 3.0%
Average
Average 0.40 5.5% 15.0% 0.0% 3.0% 10.0% 7.5%
Above
0.20 5.5% 30.0% -11.0% 41.0% 25.0% 9.5%
Average
Boom 0.10 5.5% 45.0% -21.0% 26.0% 38.0% 12.0%

ȓ 5.5% 12.4% 1.0% 9.8% 10.5% 6.7%

C.1. Calculate the Standard Deviation?
C. 1. Calculate the Standard Deviation?

Standard Deviation (σ) is a statistical measure

of the variability of a set of observation.

n 2
σ = ∑ (ri- ȓ) Pi
i=1
 Return on Alternatives Investments

State of the U.S Market 2-Stock

Probability T-Bills High Tech Collections
Economy Rubber Portofolio Portofolio

Recession 0.10 5.5% -27.0% 27.0% 6.0% -17.0% 0.0%

Below
0.20 5.5% -7.0% 13.0% -14.0% -3.0% 3.0%
Average
Average 0.40 5.5% 15.0% 0.0% 3.0% 10.0% 7.5%
Above
0.20 5.5% 30.0% -11.0% 41.0% 25.0% 9.5%
Average
Boom 0.10 5.5% 45.0% -21.0% 26.0% 38.0% 12.0%

σ 0% 20% 13% 18.8% 15.2% 3.4%

C 2. What type of risk is measured by σ ?

Answer :

σ measures total or stand-alone risk.

The larger σ ; the lower probability that actual

returns will be close to the expected return.
C.3 Draw a graph that shows roughly the shape of the probability
distributions for High Tech, U.S Rubber, and T-Bills.
D. 1. Calculate CV value for every investments ?

Coefficient of Variation (CV) is the standardized measure

of the risk per unit of return; calculation as the standard
deviation divided by the expected return.

Standard Deviation
Shows risk per CV =
unit of return Expected Rate of Return
 Return on Alternatives Investments

State of the U.S Market 2-Stock

Probability T-Bills High Tech Collections
Economy Rubber Portofolio Portofolio

Recession 0.10 5.5% -27.0% 27.0% 6.0% -17.0% 0.0%

Below
0.20 5.5% -7.0% 13.0% -14.0% -3.0% 3.0%
Average
Average 0.40 5.5% 15.0% 0.0% 3.0% 10.0% 7.5%
Above
0.20 5.5% 30.0% -11.0% 41.0% 25.0% 9.5%
Average
Boom 0.10 5.5% 45.0% -21.0% 26.0% 38.0% 12.0%

CV 0 1.62 13.2 1.90 1.4 0.5

D.2.
D. Does the CV value produce the same risk ranking as the
standard deviation ?

Answer :

Ranking σ CV

1 High Tech Collection

2 US Rubber US Rubber
3 Collections High Tech
4 T-Bills T-Bills
E.1 Suppose you created a 2-stocks portfolio by investing $50,000 in High Tech and
$50,000 in Collections.
Calculate the expected return, the standard deviation, and CV, for this portfolio
Deviation =
Actual
State of the Weighted Deviation Square Deviation
High Tech Collections Probability Return-
Economy Average (%) Square * Probability
Expected
Return

Recession -27.0% 27.0% 0.00% 0.10 -6.70% 0.004489 0.0004489

Below Average -7.0% 13.0% 3.00% 0.20 -3.70% 0.001369 0.0002738

Average 15.0% 0.0% 7.50% 0.40 0.80%

6.4E-05 0.0000256

Above Average 30.0% -11.0% 9.50% 0.20 2.80% 0.000784 0.0001568

Boom 45.0% -21.0% 12.00% 0.10 5.30% 0.002809 0.0002809

32.00% -1.50% 0.001186

ȓ : 6.7% CV: 0.5 Standard Deviation : 0.034

E.2
How does the riskiness of this 2-stock portfolio compare
with the riskiness of the individual stocks if they were
held in isolation ?

Answer :

Using either σ or CV as our stand-alone risk

measure, the 2 stock portfolio is significantly less
than the stand-alone risk of the individual stocks.

U.S 2-Stock
Measurement High Tech Collections
Rubber Portofolio

σ 20% 13% 18.8% 3.4%

CV 1.62 13.2 1.90 0.5

F. 1. What would happen to the riskiness and to the expected return of
portofolio as more randomly selected stock were added to the portofolio ?

3-Stock
Measurement High Tech Collections U.S Rubber
Portofolio

ȓ 12.4% 1.0% 9.8% 7.7%

p would decrease because the added stocks

would not be perfectly correlated.

As more stocks are added, each new stock has a

smaller risk-reducing impact.
F. 1. What would happen to the riskiness and to the expected return of
portofolio as more randomly selected stock were added to the portofolio ?

Randomly Selected Portofolio

Market
Risk
 F.2. What is the implication for investor? Draw a graph of two portofolios to ilustrate
your answer
Density

Portfolio of stocks
with rp = 16%

One
Stock
%
0 16 Return

The implication is clear: investors should hold well-diversified portfolios

of stocks rather than individual stocks.

they can eliminate about half of the riskiness inherent in individual

stocks.
G.1 Should the effects of a portfolio impact the way investors
think about the riskiness of the individual stocks ?
Answer :
most people are risk averse. Thus, they will take the high
return investment and low risk. Individual stock has higher
risk than portfolio.
G.2 If you decided to hold 1-stock portfolio(and consequently
were exposed to more risk than diversified investors),
could you expect to be compensated for all of your risk.
Could you earn a risk premium on the part of your risk that
you could have eliminated by diversifying ?
Answer G2:
Hold 1 Stock  Diversifiable Risk High  Not Compensated
Stock Price UP  Low Return  Low risk Premium

Required Rate of Return r = rRF+ RPM x b

i i

Risk Free Return

Beta Coefficient
H. 1. What is Beta Coefficient, and how are betas used in risk
analysis

Beta Coefficient is matrix that shows the

extent to which a given stock’s return
move up and down with the stock
market.

Beta measures market risk (+ graph)

The higher beta, the higher the expected

rate of return
Illustration of beta = slope

Beta
Coefficient,
b
H.2 Do the expected returns appear to be related to each
alternative’s market risk ?
High Risk
Answer : related. Beta measures market risk. High Return
Return on Alternatives Investments
State of the U.S Market 2-Stock
Probability T-Bills High Tech Collections
Economy Rubber Portofolio Portofolio

Recession 0.10 5.5% -27.0% 6.0% 27.0% -17.0% 0.0%

Below Average 0.20 5.5% -7.0% -14.0% 13.0% -3.0% 3.0%

Average 0.40 5.5% 15.0% 3.0% 0.0% 10.0% 7.5%

Above Average 0.20 5.5% 30.0% 41.0% -11.0% 25.0% 9.5%

Boom 0.10 5.5% 45.0% 26.0% -21.0% 38.0% 12.0%

ȓ 5.5% 12.4% 9.8% 1.0% 10.5% 6.7%

b 0 1.310 0.88 -0.87 1.00 0.22

H.3 Is it possible to choose among the alternatives on the basis of the information
developed thus far ? Graph the calculate how T-Bill’s, High Tech , and the
market’s beta coefficients are calculated.
Answer :
No, because we can not evaluate investment by one measurement, but overall
(Expected return, beta, std deviasi, CV )

High Tech and T-Bills

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
-10.0%

-20.0%

-30.0%

-40.0%
I.1.i Write the SML, use it to calculate the required of return ?
Answer :
SML = Risk Free Return + (Market Risk Premium) *( Stock beta)

State of the High U.S Market 2-Stock

Probability T-Bills Collections
Economy Tech Rubber Portofolio Portofolio

Recession 0.10 5.5% -27.0% 6.0% 27.0% -17.0% 0.0%

Below
0.20 5.5% -7.0% -14.0% 13.0% -3.0% 3.0%
Average
Average 0.40 5.5% 15.0% 3.0% 0.0% 10.0% 7.5%
Above
0.20 5.5% 30.0% 41.0% -11.0% 25.0% 9.5%
Average
Boom 0.10 5.5% 45.0% 26.0% -21.0% 38.0% 12.0%
ȓ 5.5% 12.4% 9.8% 1.0% 10.5% 6.7%

SML 5.5% 12.1% 9.9% 1.15% 10.50% 6.3%

I.1.ii
Graph the relationship between expected and required rates of retun
Answer :
Relationship Required Rate of Return and Expected Return
14.0%

12.0%

10.0%

8.0%
Expected Return
6.0% Required Return

4.0%

2.0%

0.0%
-1 -0.5 0 0.5 1 1.5
I.2
How do expected rate of return compare with required rate of return?
Answer :
Return on Alternatives Investments
Market
State of the High U.S 2-Stock
Probability T-Bills Collections Portofoli
Economy Tech Rubber Portofolio
o

Recession 0.10 5.5% -27.0% 6.0% 27.0% -17.0% 0.0%

Below
0.20 5.5% -7.0% -14.0% 13.0% -3.0% 3.0%
Average
Average 0.40 5.5% 15.0% 3.0% 0.0% 10.0% 7.5%
Above
0.20 5.5% 30.0% 41.0% -11.0% 25.0% 9.5%
Average
Boom 0.10 5.5% 45.0% 26.0% -21.0% 38.0% 12.0%

ȓ 5.5% 12.4% 9.8% 1.0% 10.5% 6.7%

SML 5.5% 12.1% 9.9% 1.15% 10.50% 6.3%

I.3 Does the Collections’s expected return less than T-Bills rate
make any sense ?
Return on Alternatives Investments

State of the Economy Probability T-Bills Collections

Recession 0.10 5.5% 27.0%

Below Average 0.20 5.5% 13.0%

Average 0.40 5.5% 0.0%

Above Average 0.20 5.5% -11.0%

Boom 0.10 5.5% -21.0%

ȓ 5.5% 1.0%

T-Bills’s ȓ is higher than Collections’s ȓ

I.4 What would be the risk and required rate of return of 50-50 portfolio of High
Tech and Collections ? High Tech and U.S. Rubber?
Answer :
Return on Alternatives Investments
State of 2-Stock 2-Stock Portofolio
the ProbabilityMarket Portofolio Portofolio H&U
Economy
High Tech & High Tech &US
Collection Rubber
Recession 0.10 -0.17 0 -0.105
Below
0.20 -0.03 0.03 -0.105
Average
Average 0.40 0.1 0.075 0.09
Above
0.20 0.25 0.095 0.355
Average
Boom 0.10 0.38 0.12 0.355
ȓ 10.50% 6,7 % 11,1%
b 1 0.22060676 1.003096788
SML 10.50% 6.34% 10.52%
J.1. Suppose Investor raised their inflation expectations by 3% over current estimates ,
5.5% risk free rate. What effect would higher inflation have on the SML and on the
returns required on high- and low-risk securities?
SML Inflation 3%

SML = Risk Free Return + (Market Risk Premium) *( Stock beta)

+ Inflation

Return on Alternatives Investments

Market
State of the High U.S 2-Stock
Probability T-Bills Collections Portofoli
Economy Tech Rubber Portofolio
o
ȓ 5.5% 12.4% 9.8% 1.0% 10.5% 6.7%
1.31030 0.2206067
b 0 8629 0.88 -0.87 1.00 6
SML 5.5% 12.1% 9.9% 1.15% 10.50% 6.3%
SML inflation
+3% 8.5% 15.1% 12.9% 4.2% 13.5% 9.3%
J.2.
Suppose instead that investor’ risk aversion increased enough to cause the market risk
premium to increase by 3% (inflation=constant), what effect would this have on SML
and on returns of high- and low-risk securities?

SML Risk Averse 3%

SML = Risk Free Return + (Market Risk Premium + Risk Averse)

*( Stock beta)

Return on Alternatives Investments

State of the U.S Market 2-Stock

Probability T-Bills High Tech Collections
Economy Rubber Portofolio Portofolio
ȓ 5.5% 12.4% 9.8% 1.0% 10.5% 6.7%
1.310308
b 0 629 0.88 -0.87 1.00 0.22060676
SML 5.5% 12.1% 9.9% 1.15% 10.50% 6.3%
SML risk
premium +3% 5.5% 16.0% 6.5% -1.46% 13.50% 7.3%