1) Stock A has the following probability distribution of expected returns. What is Stock A's expected rate of return and standard deviation?
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Probability________Rate of Return
0.1.............................-15%
0.2.................................0
0.4................................5
0.2............................10
0.1............................25
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2) If rRF = 5%, rM=11%, and b=1.3 for Stock X, what is rX, the required rate of return for Stock X?
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3) Refer to Problem #2 above, What would rX be if investors expected the inflation rate to increase by 2 percentage points?
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4) Refer to Problem #2 above, What would rX be if an increase in investors' risk aversion caused the market risk premium to increase by 3 percentage points? RRF remains at 5 percent.
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5) Refer to Problem #2 above, What would rX be if investors expected the inflation rate to increase by 2 percentage points and their risk aversion increased by 3 percentage points?
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6) You own a 3-stock portfolio with a total investment value equal to $300,000. What is the weighted average beta of your 3-stock portfolio?
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Stock_____Investment (Thousands)______Beta
A.........................$100..............................0.5
B..........................100...............................1.0
C..........................100...............................1.5
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7) The Magnolia Investment Fund that you manage has a total of investment of $450 million in five stocks. What is the fund's overall, or weighted average beta?
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Stock______Investment (Millions)_______Beta
1.........................$130.............................0.4
2..........................110..............................1.5
3............................70..............................3.0
4.........................90..........................2.0
5.........................50..........................1.0
TOTAL...............$450
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8) Refer to Problem #7. If the risk-free rate is 12 percent and the market risk premium is 6 percent, what is the required rate of return on Magnolia Fund?
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9) You are managing a portfolio of 10 stocks, which are held in equal dollar amounts. The current beta of the portfolio is 1.8, and the beta of Stock A is 2.0. If Stock A is sold and the proceeds are used to purchase a replacement stock, what does the beta of the replacement stock have to be to lower the portfolio beta to 1.7?