1. Stock A has the following probability distribution of expected returns:

Probability Rate of Return

0.1 -15%

0.2 0

0.4 5

0.2 10

0.1 25

What is Stock As expected rate of return and standard deviation?

a. 8.0%; 9.5% d. 5.0%; 6.5%

b. 8.0%; 6.5% e. 5.0%; 9.5%

c. 5.0%; 3.5%

2. If r_RF = 5%, r_M = 11%, and b = 1.3 for Stock X, what is r_X, the required rate of return for Stock X?

a. 18.7% b. 16.7% c. 14.8% d. 12.8% e. 11.9%

1. Refer to Problem 4. What would r_X be if investors expected the inflation rate to increase by 2 percentage points?

a. 18.7% b. 16.7% c. 14.8% d. 12.8% e. 11.9%

2. Refer to Problem 4. What would r_X be if an increase in investors risk aversion caused the market risk premium to increase by 3 percentage points? r_RF remains at 5 percent.

a. 18.7% b. 16.7% c. 14.8% d. 12.8% e. 11.9%

3. Refer to Problem 4. What would k_X be if investors expected the inflation rate to increase by 2 percentage points and their risk aversion increased by 3 percentage points?

a. 18.7% b. 16.7% c. 14.8% d. 12.8% e. 11.9%