QUESTION 1 Assume the following data for a stock: beta = 0.9; risk-free rate = 4 percent; market rate of return = 24 percent; and expected rate of return on the stock = 23 percent. Then the stock is: correctly priced. overpriced. this is the wrong answer underpriced. The answer cannot be determined.

A stock's return has the following distribution: Demand for theCompany's Products Probability of ThisDemand Occurring Rate of Return if ThisDemand Occurs (%) Weak   0.1   -20 %  Below average   0.2   -8   Average   0.4   17   Above average   0.2   35   Strong   0.1   65       1.0       Calculate the stock’s expected return and standard deviation. Do not round intermediate calculations. Round your answers to two decimal places. Expected return:   % Standard deviation:   %

Consider the two stocks below. Which has a positive beta (i.e., tends to move in the same direction as the market)? Which has a higher R2 (1.e., market returns explain more of its return patterns)? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Stock 1 has a positive beta and a higher R² a b C d Stock 2 has a positive beta and a higher R² Stock 1 has a positive beta, but Stock 2 has a higher R Stock 2 has a positive beta, but Stock 1 has a higher R² ft RM Stock 2 Stock 1 Par

Your client is considering purchasing stocks.  The actual return of one o his choices follows here.  Assist him by calculating the standard deviation and advise him what the risk is. Stock 'A' Actual Returns = 6%, 12%, 8%, 10% 0.0164 0.0258 0.0542 0.1072

b. Consider the following information about three stocks: Probability of State of i. ii. iii. iv. State of Economy V. Boom Recession Economy 0.40 0.60 From the information given, you are required to answer the following questions. Compute the Standard Deviation for each stock. Compute the Coefficient Variation for each stock. Based on your computation in part (i) and (ii), which stock is riskier? Explain your answer. Rate of Return if State Occurs Stock Hang Stock Hang Jebat 7% 13% Tuah 28% (5%) Stock Hang Kasturi 15% 3% Assume that you have RM14,000 invested in Stock Hang Jebat whose beta is 1.5, RM19,000 invested in Stock Hang Kasturi whose beta is 2.5 and RM17,000 invested in Stock Hang Tuah whose beta is 1.6. Determine what is the beta of this portfolio. Based on your answer in part (iv), compute the required rate of return for this portfolio, given that the market rate of return is 13% and risk-free rate is 5%.

Consider the following information on Stocks I and II: Probability of State of Economy State of Economy Rate of Return if State Occurs Stock I Stock II Recession .22 .045 -.37 Normal .62 .355 .29 Irrational .16 exuberance .215 .47 The market risk premium is 11.7 percent, and the risk-free rate is 4.7 percent. a. Calculate the beta and standard deviation of Stock I. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. b. Calculate the beta and standard deviation of Stock II. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskier"? a. Beta Standard deviation b. Beta Standard deviation c. Most systematic risk d. Most unsystematic risk e. "Riskier" stock 1.94 % %

Compute the abnormal rates of return for the following stocks assuming the following systematic risk measures (betas): Rit = return for stock i during period t Rmt = return for the aggregate market during period t Bi = beta for stock i Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBt: ARFt: ARTt: ARct: ARET: % % % % Stock B F T C E % Rit 10.1% 9.4 13.2 11.2 15.1 Rmt 3.9% 8.5 10.0 15.6 11.2 Bi 1.00 1.10 1.45 0.65 -0.40

1. If a stock has  a(Alpha)=0.002, b(Beta)=1.4,  Using the market model (eq. 7.4), find the expected percent return for the above stock if the market return is expected to be 2% and the risk free rate is 1%. 2.  Assume stock prices follow a random walk and a particular stock has had the following recent stock prices: Day 1: 129.5 Day 2: 126.9 Day 3: 127.1 what is the best estimate of day 4 prices?

U Assume CAPM holds. We know expected return and beta of two stocks: Stock A: E[ra] = 10% and beta_a = 1.5 Stock B: E[rb] = 5% and beta_b = 0.5 What would be the expected return of a stock that has a beta of 0.9? O 6.5% Ⓒ7% O 7.5% O 6% Question 5 Which of the following statements is false? o The CAPM follows from equilibrium conditions in a frictionless mean-variance economy with rational investors According to CAPM, everyone should hold a mix of the market portfolio and the risk-free asset. According to CAPM, everyone can generate positive return by buying positive alpha stocks and by selling negative alpha stocks. According to CAPM, the expected return on a stock is a linear function of its beta.

If a stock's expected return plots on or above the SML, then the stock's return is SML, the stock's return is to compensate the investor for risk. cent to compensate the investor for risk. If a stock's expected return plots below the The SML line can change due to expected Inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): Tar 4%; 10 % ; RPM 6%, and beta - 1.1 What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. -75 % If inflation…