1. An individual has $40,000 invested in a stock with a beta of 0.4 and another $50,000 invested in a stock with a beta of 2.1. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.
2. Assume that the risk-free rate is 6% and that the expected return on the market is 14%. What is the required rate of return on a stock that has a beta of 0.7?
________ %
3. Assume that the risk-free rate is 3% and that the market risk premium is 6%.
What is the required rate of return on a stock with a beta of 1.2? Round your answer to two decimal places.
________ %
What is the required rate of return on a stock with a beta of 0.4? Round your answer to two decimal places.
________ %
4.
A stock's return has the following distribution:
Demand for the Probability of This Rate of Return if This
Company's Products Demand Occurring Demand Occurs (%)
Weak 0.1 -20%
Below average 0.2 -10
Average 0.4 11
Above average 0.2 30
Strong 0.1 55
1.0
Calculate the stock's expected return. Round your answer to two decimal places.
Calculate the standard deviation. Round your answer to two decimal places.
Calculate the coefficient of variation. Round your answer to two decimal places.
5.
The market and Stock J have the following probability distributions:
|
Probability
|
r M
|
r J
|
|
0.3
|
12%
|
19%
|
|
0.4
|
10
|
4
|
|
0.3
|
20
|
11
|
Calculate the expected rate of return for the market. Round your answer to two decimal places.
________ %
Calculate the expected rate of return for Stock J. Round your answer to two decimal places.
________ %
Calculate the standard deviation for the market. Round your answer to two decimal places.
________ %
Calculate the standard deviation for Stock J. Round your answer to two decimal places.
________ %
Calculate the coefficient of variation for the market. Round your answer to two decimal places.
________
Calculate the coefficient of variation for Stock J. Round your answer to two decimal places.
________
6. Suppose rRF = 4%, rM = 8%, and rA = 10%.
Calculate Stock A's beta. Round your answer to two decimal places.
________
If Stock A's beta were 1.4, then what would be A's new required rate of return? Round your answer to two decimal places.
________ %
7. Suppose rRF = 8%, rM = 9%, and bi = 1.1.
What is ri, the required rate of return on Stock i? Round your answer to two decimal places.
________ %
Now suppose rRF increases to 9%. The slope of the SML remains constant. How would this affect rM and ri?
_________________
I. Both rM and ri will increase by 1%.
II. rM will remain the same and ri will increase by 1%.
III. rM will increase by 1% and ri will remain the same.
IV. Both rM and ri will decrease by 1%.
V. Both rM and ri will remain the same.
Suppose rRF decreases to 7%. The slope of the SML remains constant. How would this affect rM and ri?
_________________
I. Both rM and ri will decrease by 1%.
II. rM will decrease by 1% and ri will remain the same.
III. rM will remain the same and ri will decrease by 1%.
IV. Both rM and ri will increase by 1%.
V. Both rM and ri will remain the same.
Now assume rRF remains at 8% but rM increased to 11%. The slope of the SML does not remain constant. How would these changes affect ri?
_________________
I. ri will decrease by 2.2%.
II. ri will remain the same.
III. ri will increase by 2.2%.
Assume rRF remains at 8% but rM decreased to 8%. The slope of the SML does not remain constant. How would these changes affect ri?
_________________
I. ri will increase by 1.1%.
II. ri will remain the same.
III. ri will decrease by 1.1%.
8. Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.55. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 1.95. Calculate your portfolio's new beta. Round your answer to two decimal places.
________
9.
Suppose you manage a $4.47 million fund that consists of four stocks with the following investments:
|
Stock
|
Investment
|
|
Beta
|
|
A
|
$360,000
|
|
1.50
|
|
B
|
800,000
|
|
-0.50
|
|
C
|
1,460,000
|
|
1.25
|
|
D
|
1,850,000
|
|
0.75
|
If the market's required rate of return is 11% and the risk-free rate is 4%, what is the fund's required rate of return? Round your answer to two decimal places.
________ %
10.
Stock R has a beta of 2.5, Stock S has a beta of 0.85, the expected rate of return on an average stock is 12%, and the risk-free rate is 4%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
________ %