Tut04q - July 2009 Strictly for course AB102(2009 internal...

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July 2009 Strictly for course AB102 (2009) internal circulation only. Nanyang Business School AB102 Financial Management Tutorial 4: Risk and Rates of Return (Common Questions) 1) (8-13) Required rate of return. Suppose r RF = 9%, r M = 14%, and b i = 1.3. a) What is r i , the required rate of return on Stock i? b) Now suppose r RF (1) increases to 10 percent or (2) decreases to 8 percent. The slope of the SML remains constant. How would this affect r M and r i ? c) Now assume r RF remains at 9 percent but r M (1) increases to 16 percent or (2) falls to 13 percent. The slope of the SML does not remain constant. How would these changes affect r i ? 2) (8-19) Evaluating risk and return . Stock X has an expected return of 10 percent, a beta coefficient of 0.9, and a 35 percent standard deviation of expected returns. Stock Y has a 12.5 percent expected return, a beta coefficient of 1.2, and a 25 percent standard deviation. The risk-free rate is 6 percent, and the market risk premium is 5 percent. a) Calculate each stock’s coefficient of variation.
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Tut04q - July 2009 Strictly for course AB102(2009 internal...

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