PS2 - slope of the SML remains constant How would this...

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PS2 Fin 332 (1) 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 0.1 (50%) Below average 0.2 (5) Average 0.4 16 Above average 0.2 25 Strong 0.1 60 1.0 a) Calculate the stock’s expected return, standard deviation, and coefficient of variation. (2) Assume that the risk-free rate is 5 percent and that the market risk premium is 6 percent. What is the expected return for the overall stock market? What is the required rate of return on a stock that has a beta of 1.2? (3) Suppose rf = 5%, rm = 10%, and rA = 12%. a) Calculate stock A’s beta. b) If stock A’s beta were 2.0, what would be A’s new required rate of return? (4) Suppose rf = 9%, rm = 14%, and bi = 1.3. a) What is ri, the required rate of return on stock i? b) Now suppose rf (1) increases to 10 percent or (2) decreases to 8 percent. The
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Unformatted text preview: slope of the SML remains constant. How would this affect rm and ri? c) Now assume rf remains at 9% but rm (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri? (5) 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 required rate of return is 14% and the risk-free rate is 6%, what is the fund’s required rate of return? (6) Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate of return is 7%. By how much does the required return on the riskier stock exceed the required return on the less risky stock?...
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