FIN 300 Quiz 5 Risk and Return Solutions 2019.pdf - FIN 300...

FIN 300 Quiz 5 Risk and Return Solutions
1 & 2. Terry Dactel is considering the purchase of an asset having the
following cash flows:
Ki Prob
20 .40 8 10 100 .40 40.00
10 .50 5 0 0 .50 0
-30 .10 -3 -40 1600 .10 160.00
Exp. value 10 200.00 std. dev. = 14.14
3. Polly Khan is trying to calculate the risk-free rate given the following
information: The current market rate of interest is 8%. Investor’s have been
requiring a 10% annual return on Builtrite’s stock which has a beta of 1.5.
What is the current risk-free rate?
CAPM = RF + b(KM – RF)
10 = X + 1.5(8 – X)