8-7 PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 400,000 1.50 B 600,000 (0.50) 1,000,000 125 D 2000,000 0.75 If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return? 8-8 BETA COEFFICIENT Given the following information, detemine the beta coefficient for Stock J that is consistent with equilibrium: î = 125%; rF = 4.5%; îm = 10.5%. REQUIRED RATE OF RETURN Stock R has a beta of 1.5, Stock S has a beta of 0.75, the required return on an average stock is 13%, and the risk-free rate of retum is 7%. By how much does the required return on the riskier stock exceed the required retum on the less risky stock? 8-9 3-10 CAPM AND REQUIRED RETURN Bradford Manufacturing Company has a beta of 1.45, while Farley Industries has a beta of 0.85. The required returm on an index fund that holds the entire stock market is 12.0%. The risk-free rate of interest is 5%. By how much does Bradford's required retum exceed Farley's required return?
8-7 PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $ 400,000 1.50 B 600,000 (0.50) 1,000,000 125 D 2000,000 0.75 If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return? 8-8 BETA COEFFICIENT Given the following information, detemine the beta coefficient for Stock J that is consistent with equilibrium: î = 125%; rF = 4.5%; îm = 10.5%. REQUIRED RATE OF RETURN Stock R has a beta of 1.5, Stock S has a beta of 0.75, the required return on an average stock is 13%, and the risk-free rate of retum is 7%. By how much does the required return on the riskier stock exceed the required retum on the less risky stock? 8-9 3-10 CAPM AND REQUIRED RETURN Bradford Manufacturing Company has a beta of 1.45, while Farley Industries has a beta of 0.85. The required returm on an index fund that holds the entire stock market is 12.0%. The risk-free rate of interest is 5%. By how much does Bradford's required retum exceed Farley's required return?
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 17PROB
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Question 8-8
Transcribed Image Text:8-6
EXPECTED RETURNS Stocks X and Y have the following probability distributions of
expected future retums:
Probability
Y
0.1
(10%)
(35%)
02
2
0.4
12
20
02
20
25
0.1
38
45
a. Calculate the expected rate of return, Îy, for Stock Y (ix = 12%).
b. Calculate the standard deviation of expected returns, ox, for Stock X (oy = 20.35%).
Now calculate the coefficient of variation for Stock Y. Is it possible that most investors
will regard Stock Y as being less risky than Stock X? Explain.
8-7 PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4 million
investment fund. The fund consists of four stocks with the following investments and betas:
Stock
Investment
Beta
A
$ 400,000
1.50
B
600,000
(0.50)
1,000,000
1.25
D
2,000,000
0.75
If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's
required rate of return?
8-8 BETA COEFFICIENT Given the following information, detemine the beta coefficient for
Stock J that is consistent with equilibrium: îŋ = 12.5%; TRF = 4.5%; IM = 10.5%.
8-9
REQUIRED RATE OF RETURN Stock R has a beta of 1.5, Stock S has a beta of 0.75, the
required return on an average stock is 13%, and the risk-free rate of retum is 7%. By how much
does the required return on the riskier stock exceed the required return on the less risky stock?
8-10 CAPM AND REQUIRED RETURN Bradford Manufacturing Company has a beta of 1.45,
while Farley Industries has a beta of 0.85. The required return on an index fund that holds
the entire stock market is 12.0%. The risk-free rate of interest is 5%. By how much does
Bradford's required retum exceed Farley's required return?
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