Problem 1. (20 points) ABC Company has a beta of 0.9. The risk-free rate is 4% and the expected return on the market is 10%. a) What is the required rate of return on ABC Company's share? b) What is the market risk premium? c) What is the share risk premium? Problem 2. (20 points) You buy a shares for $250. The share pays no dividends but at the end of one year you will sell the share for $300. Calculate dollar return and rate of return. Problem 3. (30 points, 15 points each question) Table shows probability distribution of XYZ company returns. Calculate expected rate of return. Economy Probabilities Rate of Status (scenarios) Return (%) Strong 0.2 10 Normal 0.5 Week 0.3 3 7 a) Calculate expected rate of return b) Calculate the stand alone risk (standard deviation). Problem 4. (30 points, 6 points each question) Shares A and B have the following historical returns as given in the table below. You invest $1000 in share A and $3000 in share B, thus your portfolio has a total value of $4000. Year A 2015 8% 2016 10% 2017 7% 2018 6% 2% 5% 10% 12% a) Calculate the average rate of return for cach share. b) Calculate the stand-alone risk (standard deviation) for each share. Use the table for your convenience. c) Calculate what are the weights of each share in your portfolio. d) Calculate what is expected rate of return of your portfolio. Hint: first calculate what would have been the realized rate of return on the portfolio in each year. Year IB 2% 2015 2016 2017 2018 8% 10% 7% 6% 5% 10% 12% c) Calculate the risk of the portfolio, comment how does it compares with stand-alone risks