a.Sandhill made a friendly wager with a colleague that involves the result from flipping a coin. If heads comes up, Sandhill must pay her colleague $13; otherwise, her colleague will pay Sandhill $13.

What is Sandhill's expected cash flow, and what is the variance of that cash flow if the coin has an equal probability of coming up heads or tails?(Round answers to 2 decimal places, e.g. 52.75.)

Expected cash flow $$$$_________Cash flow variance__________________

Suppose Sandhill's colleague is willing to handicap the bet by paying her $17 if the coin toss results in tails. If everything else remains the same, what are Sandhill's expected cash flow and the variance of that cash flow?

Expected cash flow$____________ Cash flow variance___________

b..You know that the price of Cullumber, Inc., stock will be $30 exactly one year from today. Today the price of the stock is $28. Determine what must happen to the price of Cullumber, Inc., today in order for an investor to generate a 25 percent return over the next year. Assume that Cullumber does not pay dividends.

The price shoulddroprise-----to $___________________

c.The expected value of a normal distribution of prices for a stock is $54. If you are 99 percent sure that the price of the stock will be between $39 and $69, then what is the variance of the stock price?(Round answer to 3 decimal places, e.g. 52.750.)

Variance of stock price $_________________

d.During the period from 2011 through 2015 the annual returns on small U.S. stocks were -3.72 percent, 18.56 percent, 46.01 percent, 3.36 percent, and -3.40 percent, respectively.

What would a $1 investment, made at the beginning of 2011, have been worth at the end of 2015?(Round answer to 3 decimal places, e.g. 52.750.)

Value in 2015 $___________________

What average annual return would have been earned on this investment?(Round answer to 2 decimal places, e.g. 52.75.)

Average annual return ____________ percent per year

e. You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each one's systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk.

If the expected return and standard deviation of returns for Stock A are 12 percent and 25 percent, respectively, and the expected return and standard deviation of returns for Stock B are 18 percent and 45 percent, respectively, which should you choose? Assume that the risk-free rate is 9 percent.(Round answers to 3 decimal places, e.g. 52.750.)

Highest expected return per unit of risk stock A____________ stock b ______________

You should invest inStock B Stock because it has thehighest expected return per unit of risk.

f. Sandhill, Inc., stock has a beta of 1.50. If the expected market return is 17.0 percent and the risk-free rate is 9.0 percent, what does CAPM indicate the appropriate expected return for Sandhill stock is?(Round answer to 2 decimal places, e.g. 52.75.)

Expected return for Sandhill stock_______________%