Reference no: EM132244807

# 1 EXPECTED RETURN

A stock's returns have the following distribution:

a. Calculate the stock's expected return. Round your answer to two decimal places.
b. Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places.
c. Calculate the stock's coefficient of variation. Round your answer to two decimal places.

# 2 PORTFOLIO BETA
An individual has $20,000 invested in a stock with a beta of 0.5 and another $55,000 invested in a stock with a beta of 1.2. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.

# 3 3. Problem
Read the eBook: The Relationship Between Risk and Rates of Return

BETA AND REQUIRED RATE OF RETURN
A stock has a required return of 13%; the risk-free rate is 3.5%; and the market risk premium is 5%.
a. What is the stock's beta? Round your answer to two decimal places.

b. If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.
I. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
II. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
III. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
IV. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
V. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.

New stock's required rate of return will be _____%. Round your answer to two decimal places

4. PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a $3.99 million investment fund. The fund consists of four stocks with the following investments and betas:

If the market's required rate of return is 8% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

CAPM, PORTFOLIO RISK, AND RETURN

Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium (rM - rRF)? Round your answer to two decimal places.
%
b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
%
d. Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?

I. Less than 14%
II. Greater than 14%
III. Equal to 14%

5. CAPM, PORTFOLIO RISK, AND RETURN

Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

a. What is the market risk premium (rM - rRF)? Round your answer to two decimal places.

b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

d. Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?
I. Less than 14%
II. Greater than 14%
III. Equal to 14%

6. PORTFOLIO BETA
Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.36. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock with a beta of 1.36. What would your portfolio's new beta be? Do not round intermediate calculations. Round your answer to two decimal places.

7. REQUIRED RATE OF RETURN
Assume that the risk-free rate is 5.5% and the required return on the market is 13%. What is the required rate of return on a stock with a beta of 2.1? Round your answer to two decimal places.

8. CAPM AND PORTFOLIO RETURN
You have been managing a $5 million portfolio that has a beta of 0.85 and a required rate of return of 10%. The current risk-free rate is 6.00%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.70, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

9. PORTFOLIO BETA
A mutual fund manager has a $20 million portfolio with a beta of 0.90. The risk-free rate is 4.50%, and the market risk premium is 6.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 18%. What should be the average beta of the new stocks added to the portfolio? Do not round intermediate calculations. Round your answer to two decimal places. Enter a negative answer with a minus sign.