BUSI 420 Homework 6 RiskReturn Tradeoff Assignment solutions complete answers

BUSI 420 Homework 6 RiskReturn Tradeoff Assignment solutions complete answers

 

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.1 percent, the expected return on the market is 12.0 percent, and the betas of the two stocks are 1.3 and .8, respectively. Landon’s own forecasts of the returns on the two stocks are 16.20 percent for Furhman Labs and 11.10 percent for Garten.

 

Asset W has an expected return of 16.3 percent and a beta of 1.60. If the risk-free rate is 3.2 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

A stock has a beta of 1.3 and an expected return of 10 percent. A risk-free asset currently earns 3.4 percent.

 

b. If a portfolio of the two assets has a beta of .32, what are the portfolio weights? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

c. If a portfolio of the two assets has an expected return of 11.50 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

d. If a portfolio of the two assets has a beta of 1.41, what are the portfolio weights? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

A stock has a beta of 1.35, the expected return on the market is 17 percent, and the risk-free rate is 4.80 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.22 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

You own 500 shares of Stock A at a price of $85 per share, 300 shares of Stock B at $105 per share, and 800 shares of Stock C at $38 per share. The betas for the stocks are 1.2, 1.5, and .7, respectively. What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 25 percent in Stock S, and 25 percent in Stock T. The betas for these four stocks are 1.6, .6, 1.7, and .8, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

A stock has a beta of .8 and an expected return of 10.6 percent. If the risk-free rate is 2.7 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

A stock has an expected return of 13.9 percent and a beta of 1.80, and the expected return on the market is 10.40 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

A stock has an expected return of 11.5 percent, its beta is 1.40, and the risk-free rate is 3.4 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

A stock has an expected return of 15.4 percent, the risk-free rate is 3.8 percent, and the market risk premium is 8.2 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Given the following information, calculate the expected return and standard deviation for a portfolio that has 30 percent invested in Stock A, 35 percent in Stock B, and the balance in Stock C. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Fill in the missing information in the following table. Assume that Portfolio AB is 50 percent invested in Stock A. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

a. Your portfolio is invested 25 percent each in Stocks A and C and 50 percent in Stock B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Calculate the expected return on a portfolio of 60 percent Roll and 40 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

 

Question 1

 

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 2

 

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 3

 

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. Assume that all three states are equally likely. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 4

 

Calculate the expected returns for Roll and Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Calculate the product using the decimal value of the probability and the percentage value of the return. Input all your answers as a percent rounded to 2 decimal places.)

 

Question 5

 

Calculate the expected return on a portfolio of 50 percent Roll and 50 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 6

 

a. Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 7

 

a. Your portfolio is invested 40 percent each in A and C and 20 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

b-1. What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places.)

 

b-2. What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 8

 

Fill in the missing information in the following table. Assume that Portfolio AB is 70 percent invested in Stock A. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 9

 

Given the following information, calculate the expected return and standard deviation for a portfolio that has 37 percent invested in Stock A, 34 percent in Stock B, and the balance in Stock C. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 10

 

A stock has an expected return of 13.5 percent, the risk-free rate is 3.3 percent, and the market risk premium is 8.8 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question 11

 

A stock has an expected return of 8.2 percent, its beta is 2.10, and the risk-free rate is 5.2 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 12

 

A stock has an expected return of 13.2 percent, a beta of 1.40, and the return on the market is 10.10 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 13

 

A stock has a beta of 1.5 and an expected return of 14.9 percent. If the risk-free rate is 4.2 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 14

 

You own a stock portfolio invested 25 percent in Stock Q, 35 percent in Stock R, 35 percent in Stock S, and 5 percent in Stock T. The betas for these four stocks are 1.6, 0.5, 1.7, and 0.8, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

Question 15

 

You own 400 shares of Stock A at a price of $70 per share, 450 shares of Stock B at $85 per share, and 850 shares of Stock C at $31 per share. The betas for the stocks are 1.1, 1.6, and 0.6, respectively. What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question 16

 

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.67 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question 17

 

A stock has a beta of 0.85, the expected return on the market is 19 percent, and the risk-free rate is 3.80 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 18

 

A stock has a beta of 1.1 and an expected return of 13 percent. A risk-free asset currently earns 3.7 percent.

 

a. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

b. If a portfolio of the two assets has a beta of 0.23, what are the portfolio weights? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

c. If a portfolio of the two assets has an expected return of 12.25 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

d. If a portfolio of the two assets has a beta of 1.32, what are the portfolio weights? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 19

 

Asset W has an expected return of 16.1 percent and a beta of 1.65. If the risk-free rate is 2.3 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 20

 

Stock Y has a beta of 1.17 and an expected return of 13.20 percent. Stock Z has a beta of 0.70 and an expected return of 10 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 21

 

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

Question 22

 

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.9 percent, the expected return on the market is 11.6 percent, and the betas of the two stocks are 1.1 and 0.9, respectively. Stevens’s own forecasts of the returns on the two stocks are 15.80 percent for Furhman Labs and 12.10 percent for Garten.

 

a. Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

b. Is each stock undervalued, fairly valued, or overvalued?

 

 

Problem 12-21 CAPM (LO3, CFA3)
Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Incorporated, and Garten Testing, Incorporated. The risk-free rate is 4.0 percent, the expected return on the market is 12.1 percent, and the betas of the two stocks are 1.2 and 0.9, respectively. Landon’s own forecasts of the returns on the two stocks are 14.40 percent for Furhman Labs and 11.10 percent for Garten.

a.      Calculate the required return for each stock.

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

b.        Is each stock undervalued, fairly valued, or overvalued?

 

Problem 12-15 Relative Valuation (LO3, CFA3)
Suppose you observe the following situation:

Security
Beta
Expected Return
Peat Company
1.20
11.60
Re-Peat Company
0.70
9.80
Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

 

Problem 12-13 Relative Valuation (LO3, CFA3)
Stock Y has a beta of 0.99 and an expected return of 8.33 percent. Stock Z has a beta of 0.90 and an expected return of 8 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-11 Portfolio Risk and Return (LO3, CFA1)
Asset W has an expected return of 16.0 percent and a beta of 1.45. If the risk-free rate is 3.2 percent, what is the market risk premium?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-10 Portfolio Weights (LO4, CFA3)
A stock has a beta of 0.9 and an expected return of 11 percent. A risk-free asset currently earns 3.5 percent.

a.      What is the expected return on a portfolio that is equally invested in the two assets?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

b.        If a portfolio of the two assets has a beta of 0.29, what are the portfolio weights?

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

c.         If a portfolio of the two assets has an expected return of 11.75 percent, what is its beta?

Note: Do not round intermediate calculations. Round your answer to 4 decimal places.

d.        If a portfolio of the two assets has a beta of 1.38, what are the portfolio weights?

Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

 

Problem 12-8 Expected Returns (LO3, CFA3)
A stock has a beta of 0.80, the expected return on the market is 18 percent, and the risk-free rate is 3.70 percent. What must the expected return on this stock be?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-7 Stock Betas (LO4, CFA1)
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.27 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio?

Note: Do not round intermediate calculations. Round your answer to 2 decimal places.

 

Problem 12-6 Portfolio Betas (LO4, CFA1)
You own 500 shares of Stock A at a price of $50 per share, 325 shares of Stock B at $70 per share, and 700 shares of Stock C at $39 per share. The betas for the stocks are 1.1, 1.6, and 0.7, respectively. What is the beta of your portfolio?

Note: Do not round intermediate calculations. Round your answer to 2 decimal places.

 

Problem 12-5 Portfolio Betas (LO4, CFA3)
You own a stock portfolio invested 25 percent in Stock Q, 30 percent in Stock R, 30 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are 1.7, 0.6, 1.8, and 0.9, respectively. What is the portfolio beta?

Note: Do not round intermediate calculations. Round your answer to 3 decimal places.

 

Problem 12-4 Market Risk Premium (LO3, CFA1)
A stock has a beta of 1.5 and an expected return of 14.9 percent. If the risk-free rate is 4.2 percent, what is the market risk premium?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-3 Risk-Free Rates (LO3, CFA1)
A stock has an expected return of 12.9 percent and a beta of 1.40, and the expected return on the market is 10.60 percent. What must the risk-free rate be?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-2 Market Returns (LO3, CFA1)
A stock has an expected return of 13.0 percent, its beta is 1.20, and the risk-free rate is 5.0 percent. What must the expected return on the market be?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 12-1 Stock Betas (LO3, CFA3)
A stock has an expected return of 14.9 percent, the risk-free rate is 3.3 percent, and the market risk premium is 8.5 percent. What must the beta of this stock be?

Note: Do not round intermediate calculations. Round your answer to 2 decimal places.

 

Problem 11-11 Portfolio Returns and Volatilities (LO2, CFA4)
Given the following information, calculate the expected return and standard deviation for a portfolio that has 54 percent invested in Stock A, 30 percent in Stock B, and the balance in Stock C.

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

State of Economy
Probability of State of Economy
Returns
Stock A
Stock B
Stock C
Boom
0.80
17%
18%
23%
Bust
0.20
9
0
−9
 

Problem 11-10 Portfolio Returns and Volatilities (LO2, CFA4)
Fill in the missing information in the following table. Assume that Portfolio AB is 40 percent invested in Stock A.

Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

 

Problem 11-9 Returns and Standard Deviations (LO2, CFA4)
Consider the following information:

State of Economy
Probability of State of Economy
Rate of Return if State Occurs
Stock A
Stock B
Stock C
Boom
0.35
0.21
0.42
0.30
Good
0.20
0.14
0.21
0.12
Poor
0.30
0.02
−0.09
−0.05
Bust
0.15
−0.06
−0.26
−0.09
a. Your portfolio is invested 25 percent each in Stocks A and C and 50 percent in Stock B. What is the expected return of the portfolio?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

   b-1. What is the variance of this portfolio?

Note: Do not round intermediate calculations. Round your answer to 5 decimal places.

   b-2. What is the standard deviation?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

 

Problem 11-8 Calculating Returns and Standard Deviations (LO1, CFA1)
Consider the following information:

State of Economy
Probability of State of Economy
Rate of Return if State Occurs
Stock A
Stock B
Recession
0.35
0.07
−0.17
Normal
0.40
0.09
0.16
Boom
0.25
0.13
0.36
a.      Calculate the expected return for the two stocks.

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

b.        Calculate the standard deviation for the two stocks.

Note: Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

 

Problem 11-6 Portfolio Expected Returns (LO2, CFA2)

State of Economy
Probability of State of Economy
Security Returns if State Occurs
Roll
Ross
Bust
0.40
-11%
15%
Boom
0.60
22%
5%
Calculate the expected return on a portfolio of 50 percent Roll and 50 percent Ross by filling in the following table:

Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

 

Problem 11-4 Expected Returns (LO1, CFA1)

State of Economy
Probability of State of Economy
Security Returns if State Occurs
Roll
Ross
Bust
0.20
−19%
19%
Boom
0.80
18
6
Calculate the expected returns for Roll and Ross by filling in the following table:

Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Calculate the product using the decimal value of the probability and the percentage value of the return. Input all your answers as a percent rounded to 2 decimal places.

 

Problem 11-3 Expected Returns and Deviations (LO1, CFA1)

Use the following information on states of the economy and stock returns to calculate the expected return and the standard deviation of returns. Assume that all three states are equally likely.

Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

State of Economy
Security Return if State Occurs
Recession
−5.00%
Normal
13.00
Boom
17.00
 

Problem 11-2 Standard Deviations (LO1, CFA1)

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns.

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

State of Economy
Probability of State of Economy
Security Return if State Occurs
Recession
0.35
−5.50%
Normal
0.20
12.00
Boom
0.45
19.00
 

Problem 11-1 Expected Returns (LO1, CFA1)

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone:

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

State of Economy
Probability of State of Economy
Security Return if State Occurs
Recession
0.35
−9.00%
Normal
0.30
14.00
Boom
0.35
23.00