Page 90 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 5.8 Review Questions

1. Explain how the range is used in sensitivity analysis?
2. What relationship exists between the size of the standard deviation and the degree of asset
risk?
3. When is coefficient of variation preferred over the standard deviation for comparing asset
risk?

4. What is an efficient portfolio? How can the return and standard deviation of a portfolio be
determined?
5. Why is the correlation between asset returns important? How does diversification allow
risky assets to be combined so that the risk of the portfolio is less than the risk of the
individual assets in it?

6. What risk does beta measure? How can you find the beta of a portfolio?
7. Explain the meaning of each variable in the capital asset pricing model (CAPM) equation.
8. Why do financial managers have some difficulty applying CAPM in financial decision-
making? Generally, what benefits does CAPM provide them?
9. J Co. has the following dividend per share and the market price per share for the period
1997 to 2002.

Year Dividend Market Price ( )
1997 1.53 31.25
1998 1.53 20.75
1999 1.53 30.88
2000 2.00 67.00
2001 2.00 100.00
2002 3.00 154.00

Calculate the annual rates of return for last 5 years. How risky is the share?
10. The shares of H.Co.Ltd. has the following anticipated return with associated probabilities.

Return % Probability
–20 0.05
–10 0.10
10 0.20
15 0.25
20 0.20
25 0.15
30 0.05

Calculate the expected rate of return and the risk factor.

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