8/12/2019 Tutorial Questions Weesadk 5.- Risk Uncertain Doc

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AFF9260 Australian capital markets

WEEK 5 Tutorial Questions: Risk and Uncertainty

1. The table below shows the probability distribution of shares prices for Company .!a" Calculate the e#pected $alue of this share price

!b" Assume that Company shares ha$e a lon%&term standard de$iation of returns of0.'(. )f the shares of Company * ha$e an e#pected return of 9.1(+ and a standardde$iation of 0.'2, which company-s shares would be selected by a risk a$ersein$estor and why

Share return (%) Pro a ility

7.95 0.087.49 0.068.12 0.048.42 0.078.96 0.089.12 0.189.25 0.169.36 0.129.75 0.078.75 0.097.85 0.05

2. A risk neutral in$estor is plannin% to in$est his money for one year. )f there is /ero inflation hewould be willin% to in$est at 10+ per annum. )n fact he e#pects that the inflation rate o$er thecomin% year will be '+ per annum & what is the minimum interest rate he would accept in thiscase

(. ohn approaches a bank for a loan for one year. The risk a$erse bank has assessed thecredit risk of ohn, and has decided that ohn is a risky borrower with an e#pected defaultrate of 0.0 +. The bank is willin% to lend to ohn, pro$ided he pays an interest rate whichyields the bank an e#pected return of 1 + per annum. hat interest rate would they char%e!Assume /ero inflation"

'. *riefly e#plain !1&2 sentences" what is $olatility, e#cess return, and hed%in%.3olatiliy 4 refers to the amount of uncertainty or risk about the si/e of chan%es in a security5s $alue.

#cess return 4 )n$estment returns from a security or portfolio that e#ceed a benchmark or inde# with a similar le$elof risk.! total return of an asset or security portfolio less the risk&free return"7ed%in% 4 8the practice of mana%in% risk e#posure, usually by takin% contracts !such as deri$ati$es" that ha$e anoffsettin% e#posure- and 8a process of establishin% a second position to counterbalance an e#posed e#istin% position-.

. #plain the concept of a risk&return trade&off

The risk return tradeoff is the balance between the desire for the lowest possible risk and the hi%hestpossible return.

6. :isk mana%ement is important to the lon%&term sur$i$al of a corporation

!a" ;efine and e#plain the nature of risk.&:isk is the possibility or probability that somethin% may occur that is une#pected, not

anticipated.&:isk adds uncertainty to the business mana%ement and forecastin% processes.&A business is e#posed to both operational risks and financial risks.

8/12/2019 Tutorial Questions Weesadk 5.- Risk Uncertain Doc

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AFF9260 Australian capital markets

& ?hillips 1@ 1, p. 609.The board of directors of an or%anisation is responsible for the determination anddocumentation of all risk mana%ement ob=ecti$es. ?hillips 1@ 1', p. 610.

9. Kse the followin% returns, calculate the a$era%e returns and the standard de$iations forshares X and Y .

8/12/2019 Tutorial Questions Weesadk 5.- Risk Uncertain Doc

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AFF9260 Australian capital markets

Returns

year X Y1 0.18 0.112 0.12 0.193 0.14 0.064 0.17 0.085 0.21 0.066 0.08 0.217 0.08 0.278 0.24 0.06