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# Investment questions

Please see attached file.
1) You are the money manager of a \$10 million investment fund that consists of 2 stocks with the following investment and betas. Assume that the CAPM holds, and kRF=6%, kM=14%.
Stock Investment Beta
A \$ 4 million 1.2
B \$ 6 million 1.4
A. What is the expected return of the fund?
B. What is beta of the investment fund?

2) Given the following market conditions, calculate the expected/required rate of return using the CAPM:
kRF=6%, kM=14%
A. What is bA of a security with kA=16.4%?
B. What is ki for a security with bi=1.4?

4) From the information below, calculate the accounting break-even point.
Fixed costs are \$ 2500/year.
Variable costs: \$ 8/unit.
Depreciation: \$ 500/year.
Price: \$ 25/unit.
Discount rate: 10%.
Project life: 4 years.
Tax rate: 34%.

5) The prices for IMB over the last 3 years are given below. Assuming no dividends were paid, what was the 3-year holding period return?

Year Price
0 \$ 70
1 64
2 68
3 80

6) The total annual returns on common stocks averaged 12.2% from 1926 to 1994, small company stocks averaged 17.4%, long-term government bonds averaged 5.2%, while Treasury Bills averaged 3.7%. What was the average risk premium earned by long-term Government Bonds, and small company stocks respectively?

7) Tom bought 100 shares of stock at \$20 each. At the end of the year, he received a total of \$400 in dividends, and his stock was worth \$2,500 total.
A. What was his dollar capital gain?
B. What was his total dollar return?
C. What was his total percentage return?
D. What was his total return?

8) A portfolio is entirely invested into Gavin's Mining Equity, which is expected to return 18%, and Bob's Inc. bonds, which are expected to return 6%. Three quarters of the funds are invested in Gavin's and the rest in Bob's. What is the expected return on the portfolio?

#### Solution Summary

The solution explains some questions relating to expected return, beta, break-even, holding period return, risk premium

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