1.What is an efficient portfolio?
2.What does the beta of a stock measure?
3.You turn on the news and find out the stock market has gone up 10%. Based on the data in Table 10.6, by how much do you expect each of the following stocks to have gone up or down: (1) Starbucks, (2) Tiffany & Co., (3) Hershey, and (4) Exxon Mobil.
4.Based on the data in Table 10.6, estimate which of the following investments do you expect to lose the most in the event of a severe market down turn: (1) A $1000 investment in eBay, (2) a $5000 investment in Abbott Laboratories, or (3) a $2500 investment in Walt Disney.
5.Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%.
a. Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down.
b. Calculate the beta of a firm that goes up on average by 18% when the market goes down and goes down by 22% when the market goes up.
c. Calculate the beta of a firm that is expected to go up by 4% independently of the market.
6..Suppose the risk-free interest rate is 4%.
a. i. Use the beta you calculated for the stock in Problem 5(a) to estimate its expected return.
ii. How does this compare with the stock’s actual expected return?
b. i. Use the beta you calculated for the stock in Problem 5(b) to estimate its expected return.
ii. How does this compare with the stock’s actual expected return?