Instructions

1. Determine what level of market efficiency each event is consistent with:Immediately after an earnings announcement the stock price jumps and then stays at the new level.
2. The CEO buys 50,000 shares of his company and the stock price does not change.
3. An investor analyzes company quarterly and annual balance sheets and income statements looking for undervalued stocks. The investor earns about the same return as the S&P 500 Index.
4. Risk PremiumThe average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bonds yield during the same period was 7.6 percent. What was the market risk premium during these ten years?
5. CAPM Required ReturnHastings Entertainment has a beta of 0.44. If the market return is expected to be 12 percent and the risk-free rate is 4 percent, what is Hastings required return?
6. Expected Return RiskDetermine the standard deviation of the expected return.

Economic State

Probability

Return

Fast growth

0.2

40%

Slow growth

0.4

10%

Recession

0.4

25%

1. Portfolio BetaYou own $15,000 of Olympic Steel stock that has a beta of 2.1. You also own $35,000 of Rent-a-Center (beta = 1.2) and $10,000 of Lincoln Educational (beta = 0.7). What is the beta of your portfolio?

Submit your answer to dropbox on or before due date.