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Bus361 solutions to the suggested problems of chapter 8

# Bus361 solutions to the suggested problems of chapter 8 -...

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Chapter 8 Risk and Rates of Return Solutions to End-of-Chapter Problems 8-1 r ˆ = (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%) = 11.40%. σ 2  = (-50% – 11.40%) 2 (0.1) + (-5% – 11.40%) 2 (0.2) + (16% – 11.40%) 2 (0.4)     + (25% – 11.40%) 2 (0.2) + (60% – 11.40%) 2 (0.1) σ 2  = 712.44;  σ  = 26.69%. CV =  11.40% 26.69%  = 2.34. 8-2 Investment Beta   \$35,000 0.8   40,000 1.4 Total \$75,000   b p  = (\$35,000/\$75,000)(0.8) + (\$40,000/\$75,000)(1.4) = 1.12. 8-3 r RF  = 6%; r M  = 13%; b = 0.7; r = ? r = r RF  + (r M  – r RF )b = 6% + (13% – 6%)0.7 = 10.9%. 8-4 r RF  = 5%; RP M  = 6%; r M  = ? r M  = 5% + (6%)1 = 11%. r when b = 1.2 = ?

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r = 5% + 6%(1.2) = 12.2%. 8-5 a. r = 11%; r RF  = 7%; RP M  = 4%.         r = r RF  + (r M  – r RF )b 11% = 7% + 4%b  4% = 4%b        b = 1.
b. r RF  = 7%; RP M  = 6%; b = 1. r = r RF  + (r M  – r RF )b = 7% + (6%)1 = 13%. 8-6 a. = = N 1 i i i r P r ˆ . Y r ˆ = 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%) = 14% versus 12% for X.

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