Chapter 8 Risk and Rates of Return

P-1 EXPECTED RETURN A stocks returns have the following distribution:

DEMAND for the Probability of This Rate of Return If This

Companys Products Demand Occurring Demand Occurs

Weak 0.1 (50%)

Below Average 0.2 (5)

Average 0.4 16

Above Average 0.2 25

Strong 0.1 60

1.0

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

P-2 PORTFOLIO RATE OF RETURN An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolios beta?

P-3 REQUIRED RATE OF RETURN Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock with a beta of 0.7?

P-4 EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 5% and the market risk is premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?

P-5 BETA AND REQUIRED RATE OF RETURN A stock has a required return 11%, the risk-free rate is 7%, and the market risk premium is 4%.

a. What is the stocks beta?

b. If the market risk premium increased to 6%, what would happen to the stocks required rate of return?

Assume that the risk-free rate and the beta remain unchanged.