3. Problem 8.06 (Expected Returns) eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: (9%) 4 Probability 0.1 0.2 0,4 0.2 0.1 14 21 34 (31%) 0 22 28 37 a. Calculate the expected rate of return, TB, for Stock B (A = 13.10%.) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, A, for Stock A ( = 18.93%.) Do not round intermediate calculations. Round your answer to two decimal places. Now calculate the coeficient of variation for Stock B. Do not round intermediate calculations, Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? 1. If Stock Bis less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. 11. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. IIL. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. IV. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. V. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. -Select- c. Assume the risk free rate is 1.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places Stock A: Stock Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? 1. In a stand-alone risk sense A is less risky than B. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. II. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. III. In a stand-alone risk sense A is less risky than B. 1 Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. IV. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. V. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. Select- 4. Problem 8.07 (Portfolio Required Return) E eBook Problem Walk-Through Suppose you are the money manager of a $5.46 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta $ 380,000 1.50 B 700,000 (0.50) 1,380,000 1.25 D 3,000,000 0.75 If the market's required rate of return is 8% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round Intermediate calculations. Round your answer to two decimal places 5. Problem 8.10 (CAPM and Required Return) eBook Problem Walk-Through Beale Manufacturing Company has a beta of 1.3, and Foley Industries has a beta of 0.70. The required return on an index fund that holds the entire stock market is 13%. The risk free rate of interest is 2.5%. By how much does Beale's required return exceed Foley's required return? Do not round Intermediate calculations. Round your answer to two decimal places. 9% 6. Problem 8.11 (CAPM and Required Return) eBook Problem Walk-Through Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 4.8% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 7.0%. Mudd has a beta of 2.4, and its realized rate of return has averaged 14.5% over the past 5 years. Round your answer to two decimal places. 7. Problem 8.12 (Required Rate of Return) eBook Problem Walk-Through Suppose 6%, 9%, and b - 1.4. a. What is the required rate of return on Stock i? Round your answer to one decimal place, b. 1. Now suppose to increases to 7%. The slope of the SML remains constant. How would this affect and n? I. T will increase by 1 percentage point and n will remain the same. II. Both and will decrease by 1 percentage point. III. Both and will remain the same. IV. Both and will increase by 1 percentage point. V. I will remain the same and will increase by 1 percentage point. -Select- 2. Now suppose or decreases to 5%. The slope of the SML remains constant. How would this affect rand ? 1. will decrease by 1 percentage point and I will remain the same. II. Th Wil remain the same and will decrease by 1 percentage point. III. Both and will increase by 1 percentage point. IV. Both rm and will remain the same. V. Both and will decrease by 1 percentage point. -Select- c. 1. Now assume that remains at 6%, but increases to 10%. The slope of the SML does not remain constant. How would these changes affect n? Round your answer to one decimal place The new n will be %. 2. Now assume that in remains at 6%, but I falls to 8%. The slope of the SML does not remain constant. How would these changes affect n? Round your answer to one decimal place. The new n will be 8. Problem 8.13 (CAPM, Portfolio Risk, and Return) eBook Problem Walk-Through 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 9.10% 16% 0.8 B 11.35 16 1.3 13.15 16 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium ( - )? Round your answer to one decimal place. b. What is the beta of Fund P? Do not round Intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. % d. What would you expect the standard deviation of Fund P to be? 1. Less than 16% II. Greater than 16% III. Equal to 16% -Select