 # Answer the following questions 1. Expected return A stock&rs...

## Question

Answer the following questions

1. Expected return

A stock’s returns have the following distribution:

Demand for the Probability of This Rate of Return
Weak 0.1 (50%)
Below average 0.2 (5)
Average 0.4 16
Above Average 0.2 25
Strong 0.1 60

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

Required rate of return
Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent. What is the required rate of return on a stock with a beta of 0.7?

2. Beta and required rate of return

A stock has a required return of 11 percent; the riskfree rate is 7 percent; and the market risk premium is 4 percent.
What is the stock’s beta?

If the market risk premium is creased to 6 percent, what would happen to the stock’s required rate of return? Assume the risk-free rate and the beta remain unchanged.

3. Portfolio required return

Suppose you are the money manager of a \$4 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock Investment Beta

A \$400,000 1.50
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75

If the market’s required rate of return is 4 percent and the risk-free rate is 6 percent, what is the fund’s required rate of return?

4. Burner Aeronautics has perpetual preferred stock outstanding with a par value of \$100. The stock pays a quarterly dividend of \$2, and its current price is \$80.

a. What is its nominal annual rate of return?
b. What is its effective annual rate of return?

## Solution Preview

These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.

By purchasing this solution you'll be able to access the following files:
Solution.xlsx.

\$19.00
for this solution

or FREE if you
register a new account!

PayPal, G Pay, ApplePay, Amazon Pay, and all major credit cards accepted.

### Find A Tutor

View available Finance Tutors

Get College Homework Help.

Are you sure you don't want to upload any files?

Fast tutor response requires as much info as possible.