1. A tocks returns have the following distribution:

Demand for the companys product	Probability of this demand occurring	Rate of return if this demand occurs
Weak	0.1	- 30%
Below Average	0.1	- 14%
Average	0.3	11%
Above Average	0.3	20%
Strong	0.2	45%

Calculate the stocks expected return, standard deviation, and coefficient of variation.

2. An individual has $20,000 invested in a stock with a beta of 0.6 and another $75,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is his/her portfolios beta?

3. Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 2?

4. Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas:

Probability	A	B
0.1	- 10%	-35%
0.2	2	0
0.4	12	20
0.2	20	25
0.1	38	45

1. Calculate the expected rate of return, r_B, for Stock Y (r_A= 12%)
2. Calculate the standard deviation of expected returns, A, for Stock A (b= 20.35%)
3. Now calculate the coefficient of variation for Stock B. Is it possible that most investors

will regard Stock B as being less risky than Stock A? Explain.

5. Suppose you are the money manager of a $4.82 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$460,000	1.5
B	$500,000	-0.5
C	$1,260,000	1.25
D	$2,600,000	0.75

If the markets required rate of return is 8% and the risk-free rate is 4%, what is the funds required rate of return?

6. Stock R has a beta of 2, Stock S has a beta of 0.45, the required return on an average stock is 10%, 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?

7. 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	9.55%	15%	0.9
B	10.45%	15%	1.1
C	12.70%	15%	1.6

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 r_M r_RF ?

b. What is the beta of Fund P?

c. What is the required return of Fund P?

d. Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%,

or greater than 15%? Explain.