Risk Return Practice Problems - Chapter 7 Risk Return...

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Chapter 7 – Risk & Return – Practice HW Problems 1.(Expected Payoff) You have invested in a project that has the following possible payoffs: Probability of Payoff Occurrence $400 .10 $500 .20 $600 .30 $700 .25 $800 .15 What is the expected value of the investment’s payoff? 2.(Expected Return and Standard Deviation) You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 10% 12% State 2: Economic growth 50% 10% State 3: Economic decline 30% State 4: Depression 10% -6% Calculate the expected rate of return and standard deviation of returns for this investment. 3.(Risk Premium/CAPM) The Sahuaro Co. has a beta of 2.35. The return on the market portfolio is 13%, and the risk-free rate is 7%. According to the CAPM, what is the market risk premium? 6%

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