P8-1 Expected Return Given these three economic states, their likelihoods, and the potential returns, compute the expected return, standard deviation and coefficient of variation: P9-2 Risk Premium The average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these ten years? Economic Probability Return State Fast Growth 0.2 Slow Growth 0.6 Average market risk premium-Overall stock market return riskfree rate 35% 10% P9-3 CAPM Required Return Firerock Inc. has a beta of 3.15. If the market return is expected to be 10 percent and the risk-free rate is 3.5 percent, what is Firerock's required return? 0.2 30% Firerock's required returnRr +Bx (Rm-Rr) P8-2 Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Day Tripper has an average return of 13 percent and standard deviation of 29 percent. The average return and standard deviation of Plug Mart are 11 percent and 25 percent; and of Veggie Wok are 16 percent and 40 percent. P9-4 Portfolio Beta and Required Return You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio? Price Shares Beta P8-3 Portfolio Return At the beginning of the month, you owned $5,500 of Goodyear, $7,500 of Dunkin Donuts, and $8,000 of Reebok. The monthly returns for Goodyear, Dunkin Donuts, and Reebok were 7.44 percent,-1.36 percent, and-0.54 percent. What is your portfolio return? Mississippi, Inc. Penny Saved Stores $30.10 150 Ant, Inc. Sterling Plow Corp 3.8 1.2 $40.80100 $57.4075 $23.80 200 0.5 To solve, first you must calculate each stock's percentage of the total portfolio. Then multiple these percentages by the return for each stock. This problem can be solved two different and equivalent ways. Both ways require the weights of the stocks in the portfolio. In one method, compute the required return for each stock and then use the weights to form the portfolio required return. The other method uses the weights to compute the portfolio beta. This portfolio beta is used to compute the portfolio required return. P9-1 Investment Return Sprint Nextel Corp stock ended the previous year at $23.36 per share. It paid a $2.37 per share dividend last year. It ended last year at $18.89. If you owned 500 shares of Sprint, what was your dollar return and percent return for the year? Dollar Return (Ending Value Beginning Value) Income Percentage Return End of document [(Ending Value Beginning Value)Income]/Beginning Value
