1.

Suppose you are the money manager of a $4.64 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$ 420,000	1.50
B	400,000	(0.50)
C	1,020,000	1.25
D	2,800,000	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.

2.Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium: = 13.75%; r_RF = 6.3%; r_M = 8%. Round your answer to two decimal places.

3.Stock R has a beta of 1, Stock S has a beta of 0.6, the required return on an average stock is 11%, and the risk-free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

4.

Suppose r_RF = 6%, r_M = 9%, and b_i = 1.3.

2. Now suppose r_RF decreases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i?

-Select-IIIIIIIVVItem 3

1. What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. %

2. 1. Now suppose r_RF increases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i?

   1. Both r_M and r_i will increase by 1%.
   2. r_M will remain the same and r_i will increase by 1%.
   3. r_M will increase by 1% and r_i will remain the same.
   4. Both r_M and r_i will decrease by 1%.
   5. Both r_M and r_i will remain the same.
   -Select-IIIIIIIVVItem 2
   1. Both r_M and r_i will increase by 1%.
   2. Both r_M and r_i will remain the same.
   3. Both r_M and r_i will decrease by 1%.
   4. r_M will decrease by 1% and r_i will remain the same.
   5. r_M will remain the same and r_i will decrease by 1%.
   9. 1. Now assume that r_RF remains at 6%, but r_M increases to 10%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.
3. The new r_i will be %.

   2. Now assume that r_RF remains at 6%, but r_M falls to 8%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

   The new r_i will be %

4.

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.)

Stock	Expected Return		Standard Deviation		Beta
A	8.83%		14%		0.7
B	10.46		14		1.1
C	12.89		14		1.7

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (That is, required returns equal expected returns.)

1. What is the market risk premium (r_M - r_RF)? Round your answer to two decimal places. %
2. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
3. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. %
4. Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?
   1. Less than 14%
   2. Greater than 14%
   3. Equal to 14%

5.

Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 30% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

1. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.

   CV_x =

   CV_y =

2. Which stock is riskier for a diversified investor?

   1. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.
   2. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.
   3. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.
   4. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.
   5. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.
   -Select-IIIIIIIVVItem 3

3. Calculate each stock's required rate of return. Round your answers to two decimal places.

   r_x = %

   r_y = %

4. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? -Select-Stock XStock YItem 6

5. Calculate the required return of a portfolio that has $9,500 invested in Stock X and $8,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.

   r_p = %
6. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?