Overview:

Respond to three questions and solve three computational problems about the risk-and-return relationship.

• Competency: Define finance terminology and its application within the business environment.

o Explain what the coefficient of variation measures.

o Calculate the dollar return on an investment.

o Calculate the percentage of return on an investment.

o Calculate the coefficient of variation of stocks.

o Explain how risk is measured.

Competency: Evaluate the financial health of an organization.

o Identify the total level of risk of a stock.

o Define the concept of risk.

o Identify a source of firm-specific risk.

Instructions:

Respond to the questions and complete the problems.

Questions

In a Word document, respond to the following. Number your responses 1–3.

1. Define risk, and explain how it is measured.

2. Identify a source of firm-specific risk. What is the source of market risk?

3. Explain what the coefficient of variation measures.

Use references to support your responses as needed. Be sure to cite all references using correct APA style.

Problems

In either a Word document or Excel spreadsheet, complete the following problems.

• You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.

• If you choose to solve the problems algebraically, be sure to show your computations.

• If you use a financial calculator, show your input values.

• If you use an Excel spreadsheet, show your input values and formulas.

In addition to your solution to each computational problem, you must show the supporting work leading to your solution.

o Two years ago, Conglomco stock ended at $73.02 per share. Last year, the stock paid a $0.34 per share dividend. Conglomco stock ended last year at $77.24. If you owned 200 shares of Conglomco stock, what were your dollar return and percent return last year?

o Calculate the coefficient of variation for the following three stocks. Then rank them by their level of total risk, from highest to lowest:

o Conglomco has an average return of 11 percent and standard deviation of 24 percent.

o Supercorp has an average return of 16 percent and standard deviation of 37 percent.

o Megaorg has an average return of 10 percent and standard deviation of 29 percent.

o Year-to-date, Conglomco has earned a −1.64 percent return, Supercorp has earned a 5.69 percent return, and Megaorg has earned a 0.23 percent return. If your portfolio is made up of 40 percent Conglomco stock, 30 percent Supercorp stock, and 30 percent Megaorg stock, what is your portfolio return?