Question
Stock X 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 The
Stock X 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
The risk-free rate is 5% and the required rate of return on the market is 11%. Stock X has a beta coefficient of 1.3.
a) What is Stock X's expected rate of return and standard deviation?
b) What is the required rate of return for Stock X?
c) What would the required rate of return be if investors expected the inflation rate to increase by 2 percentage points?
d) What would the required rate of be if an increase in investors' risk aversion caused the market risk premium to increase by 3 percentage points? Assume that the risk-free rate remains at 5%.
e) What is the required rate of return if investors expected the inflation rate to increase by 2 percentage points and their risk aversion increased by 3 percentage points?
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