A D E G H Beta 4 Assigned Problem 5 6 A few years ago, the Value Line Investment Survey reported the following market betas for the 7 stocks of selected healthcare providers: 8 9 Company 10 Quorum Health Group 0.90 11 Beverly Enterprises 1.20 12 HEALTHSOUTH Corporation 1.45 13 United Healthcare 1.70 14 15. At the time these beas were developed, reasonable estimates for the risk-free rate RF, and the 16 required rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively. 1712. What are the required rates of return on the four stocks? 18 b. Why do their required rates of return differ? 19 e Suppose that a person is planning to invest in only one stock rather than hold a well-diversified 20 stock portfolio. Are the required rates of return calculated above applicable to the investment? 21 Explain your answer. 22 23 ANSWER 24 a. 25 SONNNNNNNN Spreadsheet solution: RE R(Rm) Required Rate of Return on Each Stock 27 28 29 30 31 32 33 34 35 b. 138 37 GE 39 40 Quorum Health Group Beverly Enterprises HEALTHSOUTH Corporation United Healthcare Assigned Problem 1 Assigned Problem 2 Assigned Problem G O A B E F H 1 NAME: 2 PROBLEM SET 2 3 Chapter 5 - Financial Risk and Required Return 4 Assigned Problem 3 5 6 Consider the following probability distribution of returns estimated for a proposed project that 7 involves a new ultrasound machine! 8 State of the Probability Rate of 9 economy of occurrence return 10 Very poor 0.1 -10% 11 Poor 0.2 0% 12 Average 0.4 10% 13 Good 0.2 20% 14 Very good 0.1 30% 15 16 a. What is the expected rate of return on the project? 17 b. What is the project's standard deviation of returns? 18 c. What is the project's coefficient of variation (CV) of returns? 19 d. What type of risk does the standard deviation and CV measure? 20 e. In what situation is this risk relevant? 21 22 ANSWER 23 a. 24 Expected rate of return: 25 E(R) 26 27 b. 28. The standard deviation is found as follows: 29 Variance 30 Standard Deviation 31 32 33 34