1.Your investment club has only two stocks in its portfolio. $35,000 is invested in a stock with a beta of 0.5, and $40,000 is invested in a stock with a beta of 2.5. What is the portfolio's beta?
2.Suppose that the risk-free rate is 5.5% and that the market risk premium is 4%
-What is the required rate of return on a stock with a beta of 0.8? Round your answer to two decimal places.
What is the required rate of return on a stock with a beta of 2.3? Round your answer to two decimal places.
What is the required return on the market? Round your answer to two decimal places?
3. Expected Return: Discrete Distribution
|
Demand for the
Company's Products
|
Probability of This
Demand Occurring
|
Rate of Return if This
Demand Occurs (%)
|
|
Weak
|
0.1
|
-35%
|
|
Below average
|
0.2
|
-7
|
|
Average
|
0.4
|
16
|
|
Above average
|
0.2
|
25
|
|
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.
4. Required Rate of Return
Suppose rRF = 5%, rM = 10%, and rA = 15%.
a. Calculate Stock A's beta. Round your answer to two decimal places.
b. If Stock A's beta were 2.1, then what would be A's new required rate of return? Round your answer to two decimal places.
5. As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries stock as market conditions change. Suppose rRF = 5%, rM = 8%, and bUTI = 2.1.
a. Under current conditions, what is rUTI, the required rate of return on UTI Stock? Round your answer to two decimal places.
6. Portfolio Beta
Your retirement fund consists of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.65. 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 0.85. Calculate your portfolio's new beta. Do not round intermediate calculations. Round your answer to two decimal places.
7. Portfolio Required Return
Suppose you manage a $5.13 million fund that consists of four stocks with the following investments:
|
Stock
|
Investment
|
Beta
|
|
A
|
$320,000
|
1.50
|
|
B
|
400,000
|
-0.50
|
|
C
|
1,460,000
|
1.25
|
|
D
|
2,950,000
|
0.75
|
If the market's required rate of return is 11% and the risk-free rate is 3%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
8. Required Rate of Return
Stock R has a beta of 1.4, Stock S has a beta of 0.80, the expected rate of return on an average stock is 12%, and the risk-free rate is 6%. By how much does the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
9. Historical Realized Rates of Return
You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stocks A and B have the following historical returns:
|
Year
|
|
|
|
2011
|
-15.60%
|
-15.30%
|
|
2012
|
24.75
|
25.50
|
|
2013
|
17.50
|
21.80
|
|
2014
|
-5.25
|
-13.80
|
|
2015
|
24.50
|
27.70
|
a. Calculate the average rate of return for each stock during the 5-year period. Round your answers to two decimal places.
b. Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Round your answers to two decimal places.
d. Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places. Enter negative returns with a minus sign.
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
|
Year
|
Stock X
|
Stock Y
|
Market
|
|
2011
|
12%
|
11%
|
14%
|
|
2012
|
19
|
5
|
11
|
|
2013
|
-18
|
-6
|
-12
|
|
2014
|
3
|
3
|
2
|
|
2015
|
20
|
10
|
16
|
Assume that the risk-free rate is 6% and the market risk premium is 6%. Do not round intermediate calculations.
a. What is the beta of Stock X? Round your answer to two decimal places.
What is the beta of Stock Y? Round your answer to two decimal places.
b. What is the required rate of return on Stock X? Round your answer to one decimal place.
What is the required rate of return on Stock Y? Round your answer to one decimal place.
c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to one decimal place.