Expected return on solomons stock

Question

Question 1: Suppose the expected return on the market portfolio is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc.stock has a beta of I.2.Assume the capital-asset-pricing model holds.

a. What is the expected return on Solomon's stock?

b. If the risk-free rate decreases to 33 percent. what Is the expected return on Solomon's stock?

Question 2: Suppose you have invested $30.000 in the following four stocks:

Security        Amount Invested         Beta

Stock A             $ 5,000                   0.75

Stock 8              10,000                    1.1

Stock C               8,000                   1.36

Stock D               7,000                   1.88

The risk-free race is 4 percent and the expected return on the market portfolio is IS per­cent. Based on the capital-asset-pricing model, what is the expected return on the above portfolio?

Question 3: Suppose the expected returns and standard deviations of stocks A and B are E(R_A) = 0.15, E(R_B) = 0.25, σ_A = 0.1 and  = σ_B = 0.2. respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is 0.5.

b.   Calculate the standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is -0.5.

c.   How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

Question 4: A portfolio that combines the risk-free asset and the market portfolio has an expected re­turn of 25 percent and a standard deviation of 4 percent.The risk-free rate is 5 percent.and the expected return on the market portfolio is 20 percent.Assume the capital-asset-pricing model holds. What expected rate of return would a security earn if it had a 0.5 correlation with the market portfolio and a standard deviation of 2 percent?

Question 6: You enter into a forward contract to buy a 10-year, zero-coupon bond that will be issued in one year.The face value of the bond is $1,000.and the 1-year and I I-year spot interest rates are 3 percent per annum and 8 percent per annum, respectively. Both of these Interest rates are expressed as effective annual yields (EAYs).

a. What is the forward price of your contract?

b. Suppose both the I-year and I I-year spot rates unexpectedly shift downward by 2 per­cent.VVhat is the price of a forward contract otherwise Identical to yours?