1)

Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market:

Market Return Aggressive Stock Defensive Stock

7% -4% 5%

20 35 12

a.What are the betas of the two stocks?

beta

Aggressive stock ....

Defensive stock ....

b.What is the expected rate of return on each stock if the two scenarios for the market return are equally likely to be 7% or 20%?

Expected rate of return

Aggressive stock ....%

Defensive stock ....%

What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm's stock if the two scenarios for the market return are equally likely? Also, assume a T-Bill rate of 5%.

Hurdle rate ....

2)Assume that the risk-free rate of interest is 5% and the expected rate of return on the market is 15%. A stock has an expected rate of return of 4%. What is its beta?

Beta ....

3) Assume that the risk-free rate of interest is 5% and the expected rate of return on the market is 13%. A share of stock sells for $67 today. It will pay a dividend of $4 per share at the end of the year. Its beta is 1.5. What do investors expect the stock to sell for at the end of the year?

Expected stock price .....

4)Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfolio is 17%, and on the zero-beta portfolio it is 8%. What is the expected return on a portfolio with a beta of .6?

Expected return .....

5)Suppose that there are two independent economic factors,F₁andF₂. The risk-free rate is 8%, and all stocks have independent firm-specific components with a standard deviation of 48%. PortfoliosAandBare both well-diversified with the following properties:

Portfolio Bet onF₁ Beta onF₂ Expected Return

A 2.3 2.4 26%

B 2.9 -0.24 21%

What is the expected return-beta relationship in this economy? Calculate the risk-free rate,r_f, and the factor risk premiums,RP₁andRP₂, to complete the equation below. (Do not round intermediate calculations)

E(r_P)= r_f+(_P1 RP₁)+(_P2 RP₂)

rf ....%

RP1 ....%

RP2 ....%

6)Consider the following multifactor (APT) model of security returns for a particular stock.

Factor Factor Beta Factor Risk Premium

Inflation 1.4 7%

Industrial production 0.9 9

Oil prices 0.6 5

a.If T-bills currently offer a 4% yield, find the expected rate of return on this stock if the market views the stock as fairly priced.(Do not round intermediate calculations. Round your answer to 1 decimal place.)

Excpected Rate of return ....%

b.Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known.(Do not round intermediate calculations. Round your answer to 1 decimal place.)

Factor Expected Value Actual Value

Inflation 6% 4%

Industrial production 5 7

Oil prices 3 0

Expected rate of return ...%

7) An index model regression applied to past monthly returns in Ford's stock price produces the following estimates, which are believed to be stable over time:

r_F= 0.1% + 1.1r_M

If the market index subsequently rises by 10.1% and Ford's stock price rises by 10%, what is the abnormal change in Ford's stock price?

Abnormal return .....%