1. The average annual return on an Index from 1986 to 1995 was 16.70 percent. The average annual T-bill yield during the same period was 5.90 percent. What was the market risk premium during these ten years?

2. Suppose the NASDAQ stock market bubble peaked at 5,365 in 2000. Two and a half years later it had fallen to 1,310. What was the percentage decline?

3. Suppose Paccars current stock price is $122.12 and it is likely to pay a $3.09 dividend next year. Since analysts estimate Paccar will have an 11.0 percent growth rate, what is its required return?

4. Following are three economic states, their likelihoods, and the potential returns:

Economic State		Probability		Return
Fast growth		0.24		30	%
Slow growth		0.36		7
Recession		0.40		19

Determine the standard deviation of the expected return.

5.

A manager believes his firm will earn a 13.20 percent return next year. His firm has a beta of 1.34, the expected return on the market is 11.20 percent, and the risk-free rate is 2.20 percent.

Compute the return the firm should earn given its level of risk.

6. Following are four economic states, their likelihoods, and the potential returns:

Economic State		Probability		Return
Fast growth		0.23		76	%
Slow growth		0.50		21
Recession		0.23		20
Depression		0.04		55

Compute the expected return and standard deviation.

7.

You hold the positions in the table below.

	Assumed Price			Shares			Assumed Beta
Advanced Micro Devices	$	14.00			385		4.81
FedEx Corp		134.00			90		1.25
Microsoft		46.00			149		1.16
Sara Lee Corp		24.00			229		1.96

What is the beta of your portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Portfolio beta

If you expect the market to earn 8.70 percent and the risk-free rate is 5.70 percent, what is the required return of the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Required return

%

8. You have assigned the following values to these three firms:

	Price			Upcoming Dividend							Growth			Beta
US Bancorp	$	49.15				$	3.70				7.60	%		1.85
Praxair		53.45					1.57				15.00			2.46
Eastman Kodak		14.85					1.00				7.50			0.94

Assume that the market portfolio will earn 10.60 percent and the risk-free rate is 3.00 percent.

Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

	CAPM	Constant-growth model
US Bancorp required return	%	%
Praxair required return	%	%
Eastman Kodak required return	%	%