Question 1Risk & Return and the CAPM. Based on the following.docx

Question 1
Risk & Return and the CAPM.
Based on the following information, calculate the required
return based on the CAPM:
Risk Free Rate = 3.5%
Market Return =10%
Beta = 1.08
Question 2
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of
variation and select the best investment based on the
risk/reward relationship.
Std Dev.Exp. Return
Company A 7.4
13.2
Company B 11.6
18.9
Question 3
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of
variation and select the best investment based on the
risk/reward relationship.
Std Dev.Exp. Return
Company A 10.4 15.2
· Company B 14.6 22.9
Question 4

Measures of Risk.
Address each source of risk that is measured and relate it to two
models addressed in this unit.
· Your response should be at least 250 words in length.
BBA 3301, Financial Management 1
UNIT VI STUDY GUIDE
Risk and Return
Learning Objectives
Upon completion of this unit, students should be able to:
1. Explain the risk-reward relationship.
2. Calculate holding period returns.
3. Calculate required returns using the Capital Asset Pricing
Model
(CAPM).
4. Calculate the coefficient of variation for varying investments.
5. Decompose sources of risk.
6. Contrast measures of risk.
7. Describe portfolio theory and diversification.

Written Lecture
Whenever a business or individual makes an investment
decision, risk must be
considered. This unit focuses entirely on the risk-return
relationship, providing
tools for measurement, analysis and decision making.
To begin, the term risk must be defined. From a practical or
applied perspective,
risk is the probability of losing some or all of the money
invested. In finance, risk
is often associated with volatility of variance in returns (around
some average
return). Generally, it is assumed that investments that offer
higher returns
involve greater risk. For purposes of this unit, risk is measured
through two
primary measures:
The rate of return allows an investment's return to be compared
with other
investments. For one-year investments, the return on a debt
investment is:
The return on a stock investment is calculated by the following
equation
k = [D1 + (P1 – P0)] / P0
Where:

D1 = Dividends for the “next” year (on a share of stock)
P1= Price of a share of stock, one period into the future
P0= Price of a share of stock today
The expected return on stock is the return investors feel is most
likely to occur
based on current information. Return is influenced by the
combination of stock
price (capital gains) and dividends (income). As seen in the
equation above, the
anticipated return is based on the dividends expected as well as
the future
expected price. The required return on a stock is the minimum
rate at which
investors will purchase or hold a stock based on their
perceptions of its risk.
Investors will purchase stock only if the expected return is at
least equal to their
required return. In finance, it is assumed that return is a
continuous random
variable. The mean of the distribution of returns is the expected
return. The
variance and standard deviation show how likely an actual
return will be some
distance from the expected value.
Reading
Assignment
Chapter 9:
Risk and Return
Supplemental

Reading
See information below.
Key Terms
1. Aversion (risk)
2. Beta
3. Capital asset pricing
model (CAPM)
4. Coefficient of variation
5. Diversification
6. Expected return
7. Portfolio theory
8. Required return
9. Risk
10. Security market line
(SML)
11. Standard deviation
12. Variance
The preliminary definition of investment risk is the probability
that return will be
less than expected returns. Most people have negative feelings

about assuming
risk. This is known as risk aversion. Risk aversion means
investors prefer lower
risk when expected returns are equal. When expected returns are
not equal the
choice of investment depends on the investor's tolerance for
risk.
The above figure can be found in your textbook on page 416.
One of the key tenants of finance and business involves the
trade-off between
risk and return. Higher risk investments must offer higher
expected returns to be
acceptable.
One of the more important measures of risk is variance and
standard deviation.
This measure is commonly used in statistics to measure
dispersion of outcomes
or results. Variability relates to how far a typical observation
of the variable is
likely to deviate from the mean (average). The standard
deviation gives an
indication of how far from the mean a typical observation is
likely to fall. As seen
below, assuming the same expected returns, smaller standard
deviation/variance is associated with less risk.

One of the more common measures that incorporate a measure
of risk and
return is the coefficient of variation (CV). This is a relative
measure of variation
giving the ratio of the standard deviation of a distribution to its
mean:
Risk, which is movement in returns, can be decomposed into
two sources:
-specific risk
The total movement in a stock's return is the total risk inherent
in the stock.
Market risk is caused by things that influence all stocks, such as
political news,
inflation, interest rates, war, etc. Business-specific risk is
caused by things that
influence particular firms and/or industries, such as labor
unrest, weather, or the
death of key executives.

It is important to note the following equation:
Market Risk + Business-specific Risk = Total Risk
Portfolio theory defines investment risk in a measurable way
and relates it to the
expected level of return from an investment. In portfolio theory,
risk is variability
as measured by variance or standard deviation. A risky stock
has a high
probability of earning a return that differs significantly from the
mean of the
distribution. A low-risk stock is more likely to earn a return
similar to the
expected return. Investing in portfolios enables investors to
manage and control
risk while receiving high returns.
Generally, the definition of a portfolio is the collection of
investment assets held
by an investor. Portfolios have their own risks and returns. A
portfolio’s return is
a weighted average of the returns of the stocks in it. The
portfolio’s risk is the
standard deviation of the probability distribution of its return.
The goal of the
Investor/Portfolio Owner is to capture the high average returns
of stocks while

avoiding as much risk as possible. This is accomplished
through diversification.
Diversification involves adding different (diverse) stocks to a
portfolio. Of the two
risks mentioned above, business-specific risk can be
“diversified away” in a well-
diversified portfolio.
Developed in the 1950s and 1960s by economists Harry
Markowitz and William
Sharpe, a stock's “Beta” measures its market risk which
measures the variation
in a stock's return which on the average accompanies variation
in the market's
return. Betas are developed from historical data and used in the
capital asset
price model (CAPM). It is not accurate if a fundamental change
in the firm or
business environment has occurred. Note the following when
considering Beta
-- the stock moves more than the market
-- the stock moves less than the market
-- the stock moves against the market
The Capital Asset Pricing Model (CAPM) posits investors will
not invest unless a
stock's expected return is at least equal to their required return.
The CAPM
attempts to explain how investors' required returns are
determined. Thus, the
stock’s value (price) can be estimated based on its required
return. The CAPM

includes the following variables:
-free rate (kRF) - no chance of receiving less than
what is
expected
The graphical depiction of the CAPM is known as the Security
Market Line
(SML) which proposes that required rates of return are
determined by:
The SML is actually a standard algebraic equation of a straight
line which is y =
mx + b
– y is the vertical axis variable
– x is the horizontal axis variable
– m is the slope of the line and
– b is the y intercept

Using the SML as a line of market equilibrium, the following
observations can be
made:
return, the SML
represents equilibrium
If a stock’s expected return falls below its required return (such
as point B)
investors won’t want to hold that stock.
Supplemental Reading
From the CSU Library:
Anonymous. (26 April, 2012). Mr. Rubin's discipline; Economic
growth does not
depend on budget deficits or surpluses, but on economic
fundamentals.
Wall Street Journal (Online). Retrieved from Wall Street
Journal database.
Anand, S. (07 May, 2012). Investing in funds: A monthly
analysis --- Spotlight /
Templeton Global Bond: Back at the top after a tough 2011.
Wall Street
Journal (Online). Retrieved from Wall Street Journal database.

http://search.proquest.com/docview.lateralsearchlink:lateralsear
ch/sng/author/Anand,+Shefali/$N?site=wallstreetjournal&t:ac=1
011166958/Record/1368F5AA63B76C35EFA/2&t:cp=maintain/r
esultcitationblocks
Question 1
Which of the following is an effective way of creating
clear and successful reporting schemes?
Leaders empowering subordinates to take decisions without
providing guidance
Managers ignoring the risk and taking a wait-and-see attitude
Consistent and continuous communication of the firm's values
to all stakeholders
Subordinates staying away from reporting unethical behaviors
of superiors
Question 2
Which of the following is a traditional approach to
corporate culture?
Values-based
Integrity-based

Customer-based
Compliance-based
Question 3
Which of the following is emphasized by a
compliance-based culture?
Reliance on personal integrity of employees for decision making
Use of values as the principle for decision making
Obedience to rules as the primary responsibility of ethics
Reinforcement of a set of values rather than a set of rules
Question 4
If we judge a leader solely by the results produced, we are
following the __________ ethical tradition.
deontological
virtual
Kantian

utilitarian
Question 5
According to the __________ ethics tradition, people
act out of habit than out of deliberations.
Kantian
virtue
utilitarian
principle-based
Question 6
What is corporate culture? How does it shape an
employee?
Your response should be at least 200 words in length.
BBA 4751, Business Ethics 1
UNIT III STUDY GUIDE
Ethics and Corporate Culture
Course Learning Outcomes for Unit III

Upon completion of this unit, students should be able to:
1. Define corporate culture and explain how it impacts ethical
decision
making
2. Discuss the differences between a compliance culture and a
values-
based culture.
3. Discuss the role of corporate leadership in establishing the
culture.
4. Explain the difference between effective leaders and ethical
leaders.
5. Discuss the role of mission statements and codes in creating
an ethical
corporate culture.
6. Explain how various reporting mechanisms, such as ethics
hotlines and
ombudsmen, can help integrate ethics within a firm.
7. Discuss the role of assessment, monitoring, and auditing of
the culture
and ethics program
Unit Lesson
In the second unit of our course, we examined several
traditional ethical
theories including relativism, psychological egoism,

utilitarianism, deontology,
virtue ethics, pragmatism, and a more contemporary theory
known as the
original position theory.
In this unit, we examine ways in which corporations can
develop ethical
cultures: cultures where individuals are encouraged and
supported in making
ethically responsible decisions. We also examine different types
of cultures
and how organizational leadership impacts culture.
The decision making model of ethics that was explored in the
first two units of
our course emphasizes the responsibility of individuals for the
decisions they
make in business. However, personal decision making does not
take place in
isolation. Decision making that takes place within an
organization is invariably
influenced by the culture of that organization.
Even though many organizations are both decentralized and
global, there is
always a culture in any given organization. And although a
corporation can
have many locations, with a diverse employee base and with
many different
management styles, the aspect of the company or organization
that persists
through these variations is the firm’s culture.
Part of a firm’s culture is composed of aspects of the
environment that are
unspoken but very influential. For example, IBM was once

famous for a
culture in which everyone wore white shirts and ties. Today,
software and
technology companies such as Google and Microsoft have
reputations for a
culture of informality and playfulness. Some companies have a
straight 9-5
work schedule while others expect employees to work long
hours and
weekends. All of these elements contribute to the makeup of an
organization’s
Reading
Assignment
Chapter 4:
The Corporate Culture–
Impact and Implications,
pp. 147-181
Suggested Reading
See information below.
culture, and they can all change over time. A strong leader can
prompt such

change. In the context of business, a strong business leader can
have a
significant impact on a corporate culture.
As mentioned above, a firm’s culture is a common element to an
organization and can be its sustaining value that provides
direction and
stability during challenging times. At the same time, culture can
sometimes
limit an organization if it inculcates a mentality of resistance to
change or
innovation. Therefore, cultural stability can be a benefit at one
time and can
be detrimental at another.
In addition, each person that is part of a given culture has an
impact and
perceives it in a certain way. Each person can affect others
through his or
her behavior and reactions to that culture.
A corporate culture sets the expectations and norms that can
help prioritize
how decisions are made in the organization and by whom.
Obviously, there
are different types of cultures. However, an ethical culture is
one where
employees are empowered and expected to act ethically, even
when the law
does not require it.
The two types of cultures that we focus on in this unit are
compliance-based
cultures and values-based cultures.
Compliance-based cultures emphasize obedience to the rules.

This
emphasis gives power to functions, such as legal and auditing,
to mandate
and monitor compliance with the law and with internal codes.
Values-based cultures emphasize a set of values rather than
rules. A
hallmark of these cultures is a values-based code of conduct
that encourage
a decision-making process that aligns with those stated values
and their
underlying principles.
It should be clear that a compliance culture is only as strong
and as precise
as the rules workers are expected to comply with. Conversely, a
values-
based culture recognizes that when a rule does not apply, the
firm must rely
on the personal integrity of its workforce when decisions need
to be made.
Moreover, the difference in the desired outcomes from each of
these cultural
approaches is necessarily unique. Compliance-based cultures
are focused
on outcomes that are legal and/or audit-based. Whereas, values-
based
cultures are focused on such concepts as brand and company
reputation,
recruiting and retaining the best employees, creating a positive
work
environment, and addressing social and environmental issues.
Although it is true that all people in an organization contribute
to that entity’s

culture, leadership has a more significant impact in setting the
tone through
a number of mechanisms, including the allocation of resources,
that support
and promote ethical behavior.
For example, if the ethics and compliance department in an
organization has
one person carrying out those duties in a part-time capacity,
ethics and
compliance are likely to have an insignificant impact on the
firm. Conversely,
if the ethics and compliance function is adequately staffed and
resourced, it
serves to illustrate the firm’s commitment to ethics, compliance,
and a
values-based culture.
Research shows that in order for a values-based culture of
ethics to take
root and flourish in an organization, it is critical that the leader
of the
organization is perceived as having a people-orientation, as well
as being
engaged in visible ethical action.
Ethically acting leadership can demonstrate and exhibit such
behavior
through making courageous decisions in tough situations. The
critical

element of this behavior is that it gets noticed. If an executive
is “quietly
ethical,” that individual is less likely to be perceived as an
ethical leader.
It should also be noted that there is a distinction between being
an effective
leader and an ethical leader, although those two characteristics
are not
mutually exclusive. Effective leaders may achieve their goals
through
threats, intimidation, harassment, and coercion. Ethical leaders
use more
amenable interpersonal approaches such as modeling ethical
behavior,
persuasion, or using the impact of their institutional role.
One way for a leader to foster a values-based corporate culture
is by
establishing a code of conduct. As stated above, a code of
conduct is a
statement of values. The process of creating and implementing a
code of
conduct hinges on establishing a mission for the organization.
A mission statement serves as an articulation of the fundamental
principles
at the heart of the organization, and all decisions should be
made with the
mission statement in mind.
Once the mission and code of conduct are in place, integrating
the culture
throughout the organization is critical to the success of any
relevant shift.
One of the most important elements of cultural integration is

communication.
Without promulgation of the culture, there is no clarity of
purpose, priorities
or process.
The culture should be continuously monitored for signs that the
firm is
developing negative behaviors. Such corporate culture is
sometimes
referred to as a “toxic” culture.
Characteristics of a toxic culture include the lack of any
generally accepted
base of values for the organization, and it is often evidenced in
the way a
firm treats its customers, suppliers, clients, workers, the way it
manages its
internal and external relationships, and the way the firm
manages its
finances.
As our textbook indicates, “a firm can be in a state of financial
disaster
without engaging in even one unethical act (and vice versa), but
the manner
in which it manages and communicates its financial
environment says it all”
(Hartman, DesJardins, & MacDonald, 2014, p. 172).
Reference
Hartman, L. P., DesJardins, J., & MacDonald, C. (2014).
Business ethics:

Decision making for personal integrity & social responsibility
(3rd ed.).
New York, NY: McGraw-Hill.
Suggested Reading
Click here to access the PDF of the Chapter 4 Presentation.
LRN. (2006).The impact of codes of conduct on corporate
culture. Retrieved
from www.ethics.org/files/u5/LRNImpactofCodesofConduct.pdf
Cole, C. R., He, E., McCullough, K. A., Semykina, A., &
Sommer, D. W. (2011,
September). An empirical examination of stakeholder groups as
monitoring sources in corporate governance. Journal of Risk
and
Insurance, 78(3), 703-730.
Le, S. A., Kroll, M. J., & Walters, B. A. (2011, Fall). Stages of
corporate
governance in transition economies. Journal of Business
Strategies,
28(2), 151-176.

https://online.columbiasouthern.edu/CSU_Content/courses/Busi
ness/BBA/BBA4751/14N/UnitIII_Chapter4_Presentation.pdf

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