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FI 311 Connect homework #9

# FI 311 Connect homework #9 - Connect homework#9 1 You...

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Connect homework #9 1) You recently purchased a stock that is expected to earn 10 percent in a booming economy, 7 percent in a normal economy and lose 4 percent in a recessionary economy. There is a 13 percent probability of a boom, a 75 percent chance of a normal economy. What is your expected rate of return on this stock? (FORMAT TO 4 DECIMALS) 4.00 5.68 6.07 6.42 7.03 E(r) = (0.13 x 0.10) + (0.75 x 0.07) + (0.12 x -0.04) = 6.07 percent 2) What is the beta of the following portfolio? (FORMAT TO 4 DECIMALS) Stock Amount Invested Security Beta A \$2,000 1.30 B \$3,000 1.61 C \$5,500 0.72 1.123 1.085 0.330 1.067 1.007 ValuePortfolio = \$2,000 + \$3,000 + \$5,500 = \$10,500 (\$2,000/\$10,500 x 1.30) + (\$3,000/\$10,500 x 1.61) + (\$5,500/\$10,500 x 0.72) = 1.085 3) The common stock of Jensen Shipping has an expected return of 12.06 percent. The return on the market is 9 percent and the risk-free rate of return is 4.5. What is the beta of this stock? (FORMAT TO 4 DECIMALS) 0.45 0.76 1.68 1.32 2.68 E(r) = 0.1206= 0.045 + β (0.090 - 0.045) ; β = 1.68 4) Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5 percent and the market risk premium is 7.60 percent? (FORMAT TO 4 DECIMALS) Stock Beta Expected Return A 0.75 8.78%

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B 1.48 13.80% C 1.40 13.14% D 1.02 10.36% E 0.98 10.00% Stock E Stock A Stock C Stock D Stock B E(r)A = 0.025 + (0.750 x 0.076) = 0.0820 E(r)B = 0.025 + (1.480 x 0.076) = 0.1375 E(r)C = 0.025 + (1.400 x 0.076) = 0.1314 E(r)D = 0.025 + (1.020 x 0.076) = 0.1025
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FI 311 Connect homework #9 - Connect homework#9 1 You...

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