{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

chapter 8

chapter 8 - Question 1 1 Assume that your uncle holds just...

This preview shows pages 1–2. Sign up to view the full content.

Question 1 1. Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 47% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Year ECB WCB 2007 40.00% 40.00% 2008 -10.00% 15.00% 2009 35.00% -5.00% 2010 -5.00% -10.00% 2011 15.00% 35.00% Average return = 15.00% 15.00% Standard deviation = 22.64% 22.64% Answer 3.64% 3.16% 4.36% 4.00% 3.24% 10 points Question 2 1. Stock A's stock has a beta of 1.30, and its required return is 13.25%. Stock B's beta is 0.80. If the risk-free rate is 2.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Answer 7.00% 9.21% 8.84% 11.15% 9.30% 10 points Question 3 1.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern