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Report | Analyze Risk and Return of Tech.com and Sam’s Grocery

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Added on  2020-04-01

Report | Analyze Risk and Return of Tech.com and Sam’s Grocery

   Added on 2020-04-01

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Case Study 11.Introduction 1.1BackgroundThe tradeoff between risk and return in portfolio investments is that with an increase inrisk, returns are expected to rise and vice versa [ CITATION Inv171 \l 1033 ].1.2PurposeThe purpose of the report is to analyze the risk and return of Tech.com and Sam’sGrocery shares.2.StatisticsTo assess the risk and return the following key statistics were analyzed 1.Expected ReturnExpected return = ∑xpxTech.comSam's GroceryASX 201Recession-6.00%2%-1%Average3.00%1%2%Expansion10.50%3%6%Boom7.50%2%4%Expected Return15%7%11%2.Standard DeviationTo calculate the standard deviation, we need to determine the variance then take square root i.e. Standard Deviation = SQRT(∑Px(x-mean)2Tech.comSam's GroceryASX 201Variance6.300%0.031%1.185%Standard Deviation25.100%1.761%10.886%
Report | Analyze Risk and Return of Tech.com and Sam’s Grocery_1
3.Beta Versus Standard DeviationThe standard deviation shows an asset’s individual risk and measures both systematicand unsystematic risk. Beta measures the systematic risk relative to the market. Henceboth measures are used for different purposes and it will depend on situation.4.Expected Rate of ReturnUsing CAPM , Expected Return = Risk free Rate + Beta * (Expected Market Return- Risk Free Rate)We can assume Risk free rate is the rate on one year Treasury note i.e. 5%CAPMTech.com15.08%Sam's Grocery0.16%5.Portfolio AWeight Tech.co = 30%Weight Sam’s Grocery=70%Portfolio Expected Return =30% *15% + 70%* 7% =9.4%ß= E[R]RfRmRf= (9.4%5%)(11%5%) = 0.736.Portfolio BWeight Tech.co = 70%Weight Sam’s Grocery=30%Portfolio Expected Return =70% *15% + 30%* 7% =12.6%ß= E[R]RfRmRf= (12.6%5%)(11%5%)
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= 1.277.Better PortfolioThe two share portfolio of $30,000Tech.com and $70,000Sam’s Grocery is a better portfolio because it is less volatile than the market. Furthermore, its return to risk ratio ofis higher, suggesting good performance.ReferencesInvestopedia. (2017). Risk Return Tradeoff. Retrieved from Investopedia: http://www.investopedia.com
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