08 May WHAT IS THE REQUIRED RATE OF RETURN BASED ON THIS INFORMATION?
Stock Percentage of Portfolio Beta (β) ExpectedReturn
1 20% 1.00 16%
2 30% 0.85 14%
3 15% 1.20 20%
4 25% 0.60 12%
5 10% 1.60 24%
(a) Determine the expected return on yourportfolio.
(b) Determine the portfolio beta(βP).
(c) Given the portfolio beta and the assumptions thatthe risk-free rate (rRF) is 7 percent and the expected return onthe market portfolio (rMKT) is 15.5 percent, present the equationfor the security market line (SML).
(d) Based on your equation for the SML and theexpected returns from the data in the table, which stocks appear tobe winners (i.e., underpriced) and which stocks appear to be losers(i.e., overpriced)?
8. The common stock for a particular company is knownto have a beta (β) of 1.20. The expected return on the market (rM)is 9 percent and the risk-free rate (rRF) is 5percent.
(a) Compute a fair rate of return based on thisinformation.
(b) What would be a fair rate of return if the betawere 0.85?
(c) What would be a fair rate of return if theexpected return on the market increased to 12 percent and the betaremained at 0.85?
9. The expected return for the general market (rMKT)is 12.8 percent, and the market risk premium (i.e., RPM) is 4.3percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68,respectively. What are the required rates of return for the threesecurities?
10. Hickory Stick’s common stock has a beta (β) of0.95. The expected return for the market (rM) is 7 percent and therisk-free rate (rRF) is 4 percent.
(a) What is the required rate of return based on this information?
(b) What would be the required rate of return if thebeta were 1.25?
11. An exhaustive financial analysis has produced thefollowing returns on two investments under three differentscenarios:
Expected Returns
Scenario Probability Stock X StockY
S1 0.3 10% 8%
S2 0.4 16% 15%
S3 0.3 12% 20%
(a) Calculate the expected return on eachinvestment.
(b) Calculate the standard deviations (σ) for both Xand Y.
(c) Calculate the coefficient of variation (CV) forboth X and Y.
(d) If you were to create a portfolio consisting of67% of Stock X and 33% of Stock Y, what will be the expected return(rP) and the standard deviation (σP) for yourportfolio?
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