Question #171040

QUESTION

(a). ABC's stock has a 50% chance of producing a 35% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is ABC's expected return and standard deviation?

(b). XYZ's stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and XYZ's beta remain unchanged. What is XYZ's new required return? (Hint: First calculate the beta, then find the required return.)

(c).Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows:

Stock Investment Beta

A K200,000 1.5

B 300,000 0.50

C 500,000 1.25

D 1,000,000 0.75

Expert's answer

(a)

(b)

Re=11.50

Rf=5.50

Rm-Rf=4.75

1.26-0.89=0.37

(с)

Rf=7.0

Re=15

Rm-Rf=8.79

Rm=8.79-7.0=1.79

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