ABC Company's stock has a beta of 1.95, the risk-free rate is 2.75%, and the market risk premium is 6.75%. What is ABC's required rate of return using CAPM? Ripken Iron Works believes the following probability distribution exists for its stock. What is the standard deviation of return on the company's stock? State of the Economy Probability of State Occurring Stock's Expected Return Boom 0.25 35% Normal 0.50 13% Recession 0.25 -10% Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 9.00% and the risk-free rate is 2.00%. What rate of return should investors expect (and require) on this fund? Stock Amount Beta A $1,075,000 1.20 B 675,000 1.50 C 750,000 2.75 D 500,000 1.10 $3,000,000 Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The risk-free rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 15.00%. What must the average beta of the new stocks be to achieve the target required rate of return? ? Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 60% ECB and the remainder in WCB? Year ECB WCB 2010 20.00% 25.00% 2011 -10.00% 15.00% 2012 35.00% -5.00% 2013 -5.00% -10.00% 2014 15.00% 35.00% Garvin Enterprises? bonds currently sell for $1,075. They have a 6-year maturity, an annual coupon of $90, and a par value of $1,000. What is their current yield? Sadik Inc.'s bonds currently sell for $1,275 and have a par value of $1,000. They pay a $115 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,115. What is their yield to call (YTC)? Moerdyk Corporation's bonds have a 10-year maturity, a 5.25% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 7.25%. What is the bond?s intrinsic value? Niendorf Corporation's 5-year bonds yield 8.75%, and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.45%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 2.25% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t ? 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds? A 30-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The bond currently sells for $900. What is the capital gains yield on these bonds? O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.25%, they pay interest semiannually, and they sell at a price of $800. What is the bond's nominal (annual) coupon interest rate?

ABC Company's stock has a beta of 1.95, the risk-free rate is 2.75%, and the market risk premium is 6.75%. What is ABC's required rate of return using CAPM? Ripken Iron Works believes the following probability distribution exists for its stock. What is the standard deviation of return on the company's stock? State of the Economy Probability of State Occurring 0.25 0.50 0.25 Boom Normal Recession Stock's Expected Return 35% 13% -10% Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 9.00% and the risk-free rate is 2.00%. What rate of return should investors expect (and require) on this fund? Stock A B C D Amount $1,075,000 675,000 750,000 500,000 $3,000,000 Beta 1.20 1.50 2.75 1.10 Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The riskfree rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 15.00%. What must the average beta of the new stocks be to achieve the target required rate of return? Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very lowrisk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 60% ECB and the remainder in WCB? Year 2010 2011 2012 2013 2014 ECB 20.00% -10.00% 35.00% -5.00% 15.00% WCB 25.00% 15.00% -5.00% -10.00% 35.00% Garvin Enterprises' bonds currently sell for $1,075. They have a 6-year maturity, an annual coupon of $90, and a par value of $1,000. What is their current yield? Sadik Inc.'s bonds currently sell for $1,275 and have a par value of $1,000. They pay a $115 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,115. What is their yield to call (YTC)? Moerdyk Corporation's bonds have a 10-year maturity, a 5.25% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 7.25%. What is the bond's intrinsic value? Niendorf Corporation's 5-year bonds yield 8.75%, and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.45%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 2.25% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds? A 30-year, $1,000 par value bond has a 7.50% coupon rate with interest paid semiannually. The bond currently sells for $900. What is the capital gains yield on these bonds? O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.25%, they pay interest semiannually, and they sell at a price of $800. What is the bond's nominal (annual) coupon interest rate