keownchap06 - CHAPTER 6 PROBLEMS THE MEANING AND...

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Page  CHAPTER 6 PROBLEMS THE MEANING AND MEASUREMENT OF RISK AND RETUR PROBLEM 6-1 EXPECTED RATE OF RETURN AND RISK One-year Treasury bills 9.10% DATA Probability Return 0.15 6% 0.30 9% 0.40 10% 0.15 15% Expected return = (.15)(6%) + (.3)(9%) + (.4)(10%) + (.15)(15%) = Standard deviation = PROBLEM 6-2 EXPECTED RATE OF RETURN AND RISK DATA Common Stock A Common Stock B Probability Return Probability Return 0.30 11% 0.20 -5% 0.40 15% 0.30 6% 0.30 19% 0.30 14% 0.20 22% Common Stock A = (.3)(11%)+(.4)(15%)+(.3)(19%) Expected Return = Standard Deviation = Common Stock B = (.2)(-5%)+(.3)(6%)+(.3)(14%)+(.2)(22%) Expected Return = Standard Deviation = PROBLEM 6-3 EXPECTED RATE OF RETURN AND RISK DATA
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Page  Security A Security B Probability Return Probability Return 0.20 -2% 0.10 4% 0.50 18% 0.30 6% 0.30 27% 0.40 10% 0.20 15% Security A = (.2)(-2%)+(.5)(18%)+(.3)(27%) Security B = (.1)(4%)+(.3)(6%)+(.4)(10%)+(.2)(15%) PROBLEM 6-4 REQUIRED RATE OF RETURN USING CAPM DATA Risk-free rate = 6% Market expected return = 16% Beta = 1.20 Rate of return = PROBLEM 6-5 ESTIMATING BETA RISE 1 RUN 2 BETA PROBLEM 6-6 CAPITAL ASSET PRICING MODEL Risk-free rate (R) 6.75% Expected Mkt rate (r) 12% R + (r - R) x Beta = Required rate of return Required Rate Security Beta Of Return A 1.50 B 0.90 C 0.70
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Page  D 1.15 PROBLEM 6-7 CAPITAL ASSET PRICING MODEL R + (r - R) x Beta = Required rate of return Risk-free rate (R) 7.50% Expected Mkt rate (r) 11.50% Beta 0.860 Required return PROBLEM 6-8
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