Scenario returns, a two-stock portfolio and a CAPM required return of 8.92 percent make up this MT480 Unit 5 analysis of the grower's risk and what diversification strips away. Searches like "mt 480 unit 5 assignment example", "mt480 unit 5 sample" and "mt480 unit 5 example" land here.
What a finished MT480 Unit 5 risk and return analysis looks like
About four pages, with one scenario table and one security market line. Across four states, a gas spike in a strong economy, a spike in a weak one, a normal year and a gas glut, the grower's expected return is 9.40 percent with a standard deviation of 13.06. A composite natural gas producer expects 8.15 percent with 14.16. Their correlation is negative 0.801, so a portfolio 60 percent grower and 40 percent producer carries only 4.73 percent of standard deviation while expecting 8.90. With the risk-free rate at 4.3 percent, the market premium at 5.5 and beta at 0.84, the grower's required return is 8.92 percent, leaving its scenario return 0.48 points above the line. Beta explains about 23.9 percent of the stock's sixty-month variance; the remainder is risk a diversified holder need not carry.
How a MT480 Unit 5 example is structured
The analysis moves from one stock to two, then from total risk to market risk. The scenario table comes first, probabilities in the opening column, with each expected return and standard deviation computed and the squared deviations visible. The gas producer enters next, with the covariance of negative 0.0148 and the correlation computed, and three portfolio weights tabulated to show risk falling far faster than expected return. The third section changes the question from how much a stock swings to how much of that swing an investor is paid for, introducing beta from sixty months of data and the capital asset pricing model. The security market line appears as a small chart with the grower plotted just above it. The last paragraph identifies which part of the grower's risk a diversified shareholder still bears, and why that part alone sets the required return.
Four states, four probabilities
Probabilities of 0.20, 0.15, 0.40 and 0.25 weight the grower's returns of negative 4, negative 12, 15 and 24 percent into an expected 9.40.
A partner that gains when gas spikes
The producer returns 30 percent in the strong-economy spike and loses 12 in the glut, nearly the mirror image of the grower's pattern.
Risk falls, return barely moves
Moving from 70 to 60 to 50 percent grower cuts standard deviation from 6.28 to 4.73 to 4.33 while expected return slips only from 9.03 to 8.77.
The part investors are paid for
A beta of 0.84 against a 16 percent market deviation implies 13.44 points of systematic risk inside the stock's 27.5 percent total, the rest diversifiable.
One point on the line
At 8.92 percent required and 9.40 expected, the grower plots 0.48 points above the security market line, a gap the analysis treats as within estimation error.
Where marks go in MT480 Unit 5
Standard deviations computed without the probability weights, or with deviations left unsquared, are the arithmetic slips graders find first in a scenario table. A heavier deduction comes when a paper calls the stock riskier than the market because its standard deviation is higher, then uses that figure to set the required return; the course asks for beta there, and total risk overstates what a diversified investor is paid to hold. A correlation left uninterpreted, with nothing said about its effect on the portfolio, leaves the diversification question half answered. Treating a small gap above the security market line as a buy signal, when the inputs carry more error than the gap, draws comment. Naming which risk remains after diversification, and why only that risk earns a premium, satisfies the interpretive part of most rubrics for this unit.
Get a MT480 Unit 5 example written to your instructions
Send the Unit 5 scenario data or return series your section issued, the market figures you were told to use, and the rubric. A custom analysis shows each weighted deviation, builds the portfolio one weight at a time and plots the security market line. The first custom sample is free, with a 24-48h turnaround in most cases.
MT480 Unit 5 questions, answered
Why is the correlation so strongly negative?
Because the two companies sit on opposite sides of the same price. Expensive gas raises the grower's heating costs and the producer's revenue, and cheap gas does the reverse. Few real pairs are this tidy, a point the sample makes itself; the composite pair was chosen to make the arithmetic of diversification visible. With actual return data, correlations near zero or modestly positive are far more common.
Should I use the scenario return or the CAPM return as the cost of equity?
The CAPM figure, in most sections. The scenario return estimates what the stock might earn; the CAPM gives what investors require given its market risk, and that requirement is what the firm must cover. The sample reports both, notes the 0.48-point gap and carries 8.92 percent forward, which is also the input the cost of capital unit needs next.
Where does a beta of 0.84 come from?
Typically from a regression of the stock's monthly returns on a market index over five years, and financial data sites publish such estimates. The sample states the period and index used. Betas vary with the window and the index chosen, so a sentence acknowledging that uncertainty, perhaps with the required return at a beta one tenth higher or lower, strengthens the analysis.