exam3a.ch6

# exam3a.ch6 - Name Webct User ID University of Houston C T...

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Name __________________________________ Webct User ID __________________________________ University of Houston C. T. Bauer College of Business Principles of Financial Management Finance 3332 Summer, 2007 Exam 3 A To receive full credit, show all work—equations in variable form, equations with numbers plugged in—and clearly indicate your answer. Point values are in parentheses. 1. You  are  analyzing  a stock  with a beta  of 2.0.  The  risk- free  rate  is 6 percent,  and  the  market  risk  premium  is 1   What is the  stock’s  equilibrium  required  rate  of return?  (6) 2. Referring  to the  information  in #1,  what is the  expected  return  on  the  market?  (2) 3. Given  the  following  possible  returns  over  the  coming  year  for Driason,  Inc.,  determine  the  stock’s  expected  re State Probabilit y Expected Return Reces sion 10% -30% Normal 50% 20% Boom 40% 40% 4. What is the  probability of earning  a return  of less  than  12  percent  on  a stock  whose  returns  are  normally  distri   with an  expected  return  of 8 percent  and  a standard  deviation  of 25  percent?  (8) 5. What is the  standard  deviation  of returns  for this  stock  given  the  following  historical  data  if its expected  return   percent?  (8) Year Observatio n Return 2006 1 -20% 2005 2 10% 2004 3 30% 2003 4 8% 6. Based  on  a stock’s  market  price,  you  estimate  a return  of 15  percent.  The  stock  has  a beta  of 1.6,  and  you  ca

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