Scribd
Upload
7 views

Cp-7-End of Chapter Questions

Uploaded by

mjlee2097
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
7 views

Cp-7-End of Chapter Questions

Uploaded by

mjlee2097
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

CHAPTER-7

7-2.
Required Rate of Return
Assume that the risk-free rate is 6% and that the expected return on the market is 11%. What is the
required rate of return on a stock that has a beta of 0.6?

7-3.
Expected and Required Rates of Return

Suppose the risk-free rate is 5% and the market risk premium is 7%. What is the required return on

(1) the market,

(2) a stock with a beta of 1.0, and

(3) a stock with a beta of 1.7?

7-4.
Expected Return—Discrete Distribution
A stock's return has the following distribution:

Calculate the stock's expected return, standard deviation, and coefficient of variation.
7-7.
Expected Rate of Return and Risk
The following table shows the annual returns over time for two stocks.

Probability A B
0.10 –3% –10%
0.20 2 1
0.40 7 8
0.20 12 16
0.10 17 24
Calculate each stock's expected return, standard deviation, and coefficient of variation.

7-13.
Portfolio Required Return
Suppose you are the money manager of a $9 million investment fund. The fund consists of four stocks
with the following investments and betas:

Stock Investment Beta


A $ 1,000,000 1.75
B 1,500,000 (0.50)
C 2,500,000 1.00
D 4,000,000 0.75
If the market required rate of return is 10% and the risk-free rate is 5%, what is the fund's required rate
of return?

7-14.
Expected Returns and SML
Meera has the following portfolio:

Stock Amount Invested Beta Expected Return


Bio-Eng Inc. $75,000 1.90 12.50%
Canada Pipelines Co. $125,000 0.75 6.75
Industrial Auto Parts $200,000 1.20 9.00
Upon further analysis, she determines that the current risk-free rate is 3%, while the market risk
premium is 5%.

1. What return does Meera expect on her portfolio, based on the individual stocks' expected returns?
2. What is the required return on the portfolio? What do the answers in part (a) and (b) tell you about the
stocks?
3. Meera is thinking of adding another stock, Offshore Oil Co., to her portfolio. Offshore has a beta of 2.3 and
an expected return of 14%. Should she add this stock? Briefly explain why or why not.
4. Assuming that Offshore Oil does provide the expected return required and that Meera invests another
$100,000 in Offshore Oil, what will be her portfolio's new expected return?

You might also like