Rate of Return

Year Ursula Co Orion Inc Portfolio

2008 -3.00% -14.00%

2009 -10.00% 10.00%

2010 16.00% -5.00%

2011 13.00% 39.00%

2012 34.00% 20.00%

Average

Standard Deviation

1. Use Excel to calculate the annual returns on a portfolio with 50% invested in

each stock above.

2. Use the spreadsheet (XY graph feature) to graph the returns for the two stocks

and the portfolio. Save the plot in a separate chart in the spreadsheet.

Please take care to label the graph and axes and make clear which data series

is which on the chart.

3. Interpret your graph. What effect does forming a portfolio appear to have on

the volatility of the returns relative to the stocks individually?

4. Use the spreadsheet function to calculate the average (or expected) return for the

two stocks and the portfolio.

5. Use the spreadsheet function to calculate the sample standard deviation of the

return on the portfolio.

6. Standard deviation measures stand-alone (or total risk.) What two types of risk are

included in the stand-alone risk?

7. How does the standard deviation of the portfolio returns compare to the standard

deviation of the individual stock returns? Is this surprising? Explain.

8. Would most investors prefer to own one of the stocks indivdually or the portfolio

of the two stocks? Explain.

9. The beta coefficients for both firms are provided below:

Ursula Co Orion Inc

Beta 1.4 0.8

a. Which stock is riskier based on the beta?

b. Which stock is riskier based on the standard deviation you calculated

in #1 above?

c. Which stock is riskier to a well diversified investor? Explain.

10. If T-bills yield 2% and the historical risk premium on the market is 8.2%, what is the

expected rate of return on each stock according to the CAPM?

11. What is the beta of a portfolio invested half in each stock above?

12. If T-bills yield 2% and the historical risk premium on the market is 8.2%, what is the

expected return on the portfolio based on the CAPM?