FFM11i08_solutions_rev

FFM11i08_solutions_rev - SolutionstoEndofChapterProblems 81

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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 = ? r = 5% + 6%(1.2) = 12.2%. 8-5 a. r = 11%; r RF  = 7%; RP M  = 4%. Chapter 8:  Risk and Rates of Return Integrated Case 1
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   r = r RF  + (r M  – r RF )b 11% = 7% + 4%b  4% = 4%b        b = 1. 2
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FFM11i08_solutions_rev - SolutionstoEndofChapterProblems 81

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