Question 1: EXPECTED RETURN
A stock’s returns have the following distribution:
Demand for the Probability of Rate of return if
Company's products this occurring this demand occurs
Weak 10% -50%
Below average 20% -5%
Average 40% 16%
Above average 20% 25%
Strong 10% 60%
Calculate the stock’s expected return, standard deviation, and coefficient of variation.
Question 2: REQUIRED RATE OF RETURN
Assume that the risk- free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock with a beta of 0.7?
Question 3: BETA AND REQUIRED RATE OF RETURN
A stock has a required return of 11%, the risk- free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk- free rate and the beta remain unchanged.
Question 4: PORTFOLIO REQUIRED RETURN
Suppose you are the money manager of a $ 4 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock Investment Beta
A $400,000 1.50
B $600,000 -0.50
C $1,000,000 1.25
D $2,000,000 0.75
If the market’s required rate of return is 14% and the risk- free rate is 6%, what is the fund’s required rate of return?
Question 5: CAPM AND REQUIRED RETURN
Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk- free rate is 2.5%, and the market risk premium is 6.5%. Manning has a beta of 1.7, and its realized rate of return has averaged 13.5% over the past 5 years.