Your investment club has only two stocks in its portfolio

1. Your investment club has only two stocks in its portfolio; $9,620 is invested in a stock with a beta of 0.67, and $36,160 is invested in a stock with a beta of 1.38. What is the portfolio’s beta?

Round your answer to two decimal places.

2. AA Industries’s stock has a beta of 2.40. The risk-free rate is 2.15%, and the expected return on the market is 12.90%. What is the required rate of return on AA’s stock?

Round your answer to two decimal places

3. Assume that the risk-free rate is 3.80% and that the market risk premium is 10.40%.

What is the required return on the market?

Round your answer to two decimal places

4. Assume that the risk-free rate is 4.05% and that the market risk premium is 10.60%.

What is the required rate of return on a stock with a beta of 1.20?

Round your answer to two decimal places

5. A stock’s return has the following distribution:

Demand for the

Company’s Products

Probability of This

Demand Occurring

Rate of Return if This

Demand Occurs (%)

Weak

0.14

-36.75%

Below average

0.15

-9.15%

Average

0.39

18.20%

Above average

0.18

27.85%

Strong

0.14

50.15%

Calculate the stock’s standard deviation or returns.

Work with at least four decimal places and round your final answer to two decimal places.

6. The market and Stock J have the following probability distributions:

Probability

Rm

Rj

0.29

10.65%

25.80%

0.44

5.87

10.48

0.27

20.00

32.13

(a) Calculate the expected rates of return for the market and (b) Calculate the standard deviations for the Stock J.

Work with at least four decimal places and round your final answers to two decimal places.

7. Suppose you manage a $4,298,900 fund that consists of four stocks with the following investments:

Stock

Investment

Beta

A

$150,450

1.80

B

$281,000

-0.78

C

$1,473,050

2.85

D

$2,394,400

0.98

If the market’s required rate of return is 9.85% and the risk-free rate is 5.20%, what is the fund’s required rate of return?

Work with four decimal places and round your final answer to two decimal places.

8. Stock R has a beta of 0.85, Stock S has a beta of 1.23, the expected rate of return on an average stock is 11.30%, and the risk-free rate is 4.10%. By how much does the required return on the riskier stock exceed that on the less risky stock?

Here’s the SOLUTION

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