Problem 1: Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:
|
Price
|
Rate of Return
|
Probability
|
|
$16
|
-20%
|
0.25
|
|
20
|
0%
|
0.30
|
|
24
|
+20%
|
0.25
|
|
28
|
+40%
|
0.20
|
Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
Problem 2: Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp. Assume the following conditions exist.
|
Return on the market
|
= 13%
|
|
|
3 month Treasury bill rate
|
= 6%
|
|
|
Acton 's beta
|
= 1.15
|
|
|
Boron's beta
|
= 1.40
|
|
|
Market value of Ken's investment in Acton
|
= $125,000
|
|
Market value of Ken's investment in Boron
|
= $250,000
|
|
|
$375,000
|
What does the SML predict is Ken’s required rate of return for the overall portfolio?