Chapter 8b
1.
What is the expected rate of inflation if the real rate is 4.5% and the expected nominal rate is 6%?
2.
What is the expected nominal rate if the expected real rate and rate of inflation are 2.7 and 2.5
percent respectively?
3.
Borha Investments is considering whether or not to invest in a certain security.
Calculate the
security’s expected return and standard deviation.
Probability
Retur
n
0.17
0.015
0.23
0
0.4
0.05
0.2
0.14
4.
You are considering investing in shares of
Blackened Berries Inc.
Calculate their expected
return and standard deviation.
Probability
Retur
n
0.23
1.5%
0.27
0.0%
0.3
5.0%
0.2
14.0%
5.
Compute Livin’ the Dream Inc’s required rate of return given a beta of .9, risk free rate of 3.25%,
and the expected market return of 9%.
6.
Compute Fine Co’s required rate of return given a beta of 1.5, risk free rate of 5%, and a market
premium of 4%.
7.
You are considering investing in 4 different securities.
Assume that the expected market return is
7% and the treasury bill rate is 2.5%.
Calculate the required returns for each investment
assuming the following betas.
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 Fall '11
 JimBrau
 Finance, Standard Deviation, Inflation, Probability theory, Bolton Inc

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