FINANCE
5 Questions
1) Assume that the risk-free rate is
2.5% and that the market risk premium is 8%.
What is the required rate of return
on a stock with a beta of 0.9? Round your answer to two decimal places. __________%
What is the required rate of return
on a stock with a beta of 1.5? Round your answer to two decimal places. ___________%
2) Suppose you hold a diversified
portfolio consisting of a $7,500 investment in each of 20 different common
stocks. The portfolio's beta is 1.25. Now, suppose you sell one of the stocks
with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose
beta is 1.35. Calculate your portfolio's new beta. Round your answer to two
decimal places.
3 Suppose you manage a $4.61 million
fund that consists of four stocks with the following investments:
|
Stock
|
Investment
|
Beta
|
|
A
|
$200,000
|
1.5
|
|
B
|
550,000
|
-0.5
|
|
C
|
1,060,000
|
1.25
|
|
D
|
2,800,000
|
0.75
|
If the market's required rate of
return is 9% and the risk-free rate is 6%, what is the fund's required rate of
return? Round your answer to two decimal places.
4 Stock R has a beta of 1.5, Stock S
has a beta of 0.65, the expected rate of return on an average stock is 10%, and
the risk-free rate is 6%. By how much does the required return on the riskier
stock exceed the required return on the riskier stock exceed that on the less
risky stock? Round your answer to two decimal places
5 You have observed the following
returns over time:
|
Year
|
Stock X
|
Stock Y
|
Market
|
|
2006
|
15%
|
14%
|
10%
|
|
2007
|
19
|
6
|
9
|
|
2008
|
-18
|
-7
|
-14
|
|
2009
|
5
|
2
|
1
|
|
2010
|
18
|
9
|
18
|
Assume that the risk-free rate is 4%
and the market risk premium is 15%
Assume that the risk-free rate is 4%
and the market risk premium is 15%
a)___What is the beta of Stock X?
Round your answer to two decimal places. ________
What is the beta of Stock Y? Round
your answer to two decimal places. ______
b)___What is the required rate of
return on Stock X? Round your answer to two decimal places. _______%
What is the required rate of return
on Stock Y? Round your answer to two decimal places. _________
c)------What is the required rate of
return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round
your answer to two decimal places. _________%
d)___If Stock X's expected return is
21%, is Stock X under- or overvalued?
I.
Stock X is overvalued, because its expected return exceeds its required rate of
return.
II.
Stock X is overvalued, because its expected return its is below required rate
of return.
III.
Stock Y is undervalued, because its expected return exceeds its required rate
of return.
IV.
Stock X is undervalued, because its expected return is below its required rate
of return.
V.
Stock Y is undervalued, because its expected return is below its required rate
of return.
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