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1.8 Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.3

% rate of inflation in the future. The real risk-free rate is 2.0

%, and the market risk premium is 6.0

%. Mudd has a beta of 1.7, and its realized rate of return has averaged 10.0

% over the past 5 years. Round your answer to two decimal places.

%

3.8 A stock has a required return of 15

%, the risk-free rate is 4.5

%, and the market risk premium is 5

%.

What is the stocks beta? Round your answer to two decimal places.

If the market risk premium increased to 7

%, what would happen to the stocks required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.

If the stocks beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

If the stocks beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

If the stocks beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.

If the stocks beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

If the stocks beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.

-Select-IIIIIIIVVItem 2

Stocks required rate of return will be

%.

4.8

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

StockInvestmentStocks Beta CoefficientA$160 million0.3B120 million1.5C80 million1.8D80 million1.0E60 million1.5

Kishs beta coefficient can be found as a weighted average of its stocks betas. The risk-free rate is 5

%, and you believe the following probability distribution for future market returns is realistic:

ProbabilityMarket Return0.1-28

%0.200.4130.2290.148

What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)

ri = 5.0

% + (7.1

%)bi

ri = 3.2

% + (8.0

%)bi

ri = 3.2

% + (7.1

%)bi

ri = 5.0

% + (8.0

%)bi

ri = 8.5

% + (8.1

%)bi

-Select-IIIIIIIVVItem 1

Calculate Kishs required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.

%

Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 15

%, and its estimated beta is 1.5. Should Kish invest in the new company?The new stock -Select-should notshouldItem 3 be purchased.

At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.

%

7.8 Stock X has a 9.0

% expected return, a beta coefficient of 0.7, and a 35

% standard deviation of expected returns. Stock Y has a 12.5

% expected return, a beta coefficient of 1.2, and a 20

% standard deviation. The risk-free rate is 6

%, and the market risk premium is 5

%.

Calculate each stocks coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places.

CVx =

CVy =

Which stock is riskier for a diversified investor?

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock Y has the higher beta so it is riskier than Stock X.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is riskier. Stock X has the higher standard deviation so it is riskier than Stock Y.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is riskier. Stock Y has the lower standard deviation so it is riskier than Stock X.

-Select-IIIIIIIVVItem 3

Calculate each stocks required rate of return. Round your answers to one decimal place.

rx =

%

ry =

%

On the basis of the two stocks expected and required returns, which stock would be more attractive to a diversified investor?-Select-Stock XStock YItem 6

Calculate the required return of a portfolio that has $4,500 invested in Stock X and $1,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.rp =

%

If the market risk premium increased to 6

%, which of the two stocks would have the larger increase in its required return?

-Select-Stock XStock Y

9.8 A stocks returns have the following distribution:

Demand for the

Companys ProductsProbability of This

Demand OccurringRate of Return If

This Demand OccursWeak0.1(22

%)Below average0.1(12)

Average0.313

Above average0.331

Strong0.257

1.0

Assume the risk-free rate is 2

%. Calculate the stocks expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stocks expected return:

%

Standard deviation:

%

Coefficient of variation:

Sharpe ratio:

10.8 Assume that the risk-free rate is 2.5

% and the market risk premium is 5

%. What is the required return for the overall stock market? Round your answer to one decimal place.

%

What is the required rate of return on a stock with a beta of 0.8? Round your answer to one decimal place.

%