Q1. Assume that a risk-free rate is 6% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock that has a beta of 1.2?
Q2. Assume that the risk-free rate is 6% and the expected rate of return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?
Q3. Suppose rRF =14%, and b1 = 1.3.
a) What is the ri, the required rate of return on Stock i?
b) Now suppose rRF (1) increases to 10 per cent or (2) decreases to 8 percent. The slope of the SML remains constant How would this affect rM and ri??
c) Now assume rRF remains at 9 percent but rM (1) increases to 16 percent or (2) falls to 13 percent. The slope of the SML does not remain constant. How would these affect ri?
Q4. Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:
Stock Investments Beta
A 400,000 1.5
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75
If the market required rate of return is 14 percent and the risk-free rate is 6%, what is the fund’s required rate of return?