1

The risk-free rate is 6% and the expected rate of return on the market portfolio is 11%.

a. Calculate the required rate of return on a security with a beta of 1.75. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

4

A share of stock with a beta of 0.85 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4%, and the market risk premium is 7%.

b. At what price will the stock reach an equilibrium at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

5

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, 0.4.

a. If the interest rate on Treasury bills is 6% and the expected return on the market portfolio is 16%, what is the expected return on the shares of the law firm according to the CAPM? (Enter your answer as a whole percent.)

b. Suppose you invested 80% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)