Finance: CAPM
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1: Expected Return: Discrete Distribution
The market and Stock J have the following probability distributions:
Probability Rm Rj
0.27 12.25% 25.40%
0.44 6.65 10.36
0.29 21.30 36.57
(a) Calculate the expected rates of return for the market and (b) Calculate the standard deviations for the Stock J.
Work with at least four decimal places and round your final answers to two decimal
2. Suppose you manage a $3,734,075 fund that consists of four stocks with the following investments:
Stock Investment Beta
A $149,100 1.10
B $250,850 -0.91
C $1,244,850 2.95
D $2,089,275 0.35
If the market's required rate of return is 13.80% and the risk-free rate is 5.95%, what is the fund's required rate of return?
Work with four decimal places and round your final answer to two decimal places.
3. Stock R has a beta of 0.89, Stock S has a beta of 1.97, the expected rate of return on an average stock is 11.10%, and the risk-free rate is 5.40%. By how much does the required return on the riskier stock exceed that on the less risky stock?
4. A stock's return has the following distribution:
Demand for the
Company's Products Probability of This
Demand Occurring Rate of Return if This
Demand Occurs (%)
Weak 0.09 -46.50%
Below average 0.18 -10.00%
Average 0.36 16.00%
Above average 0.21 22.95%
Strong 0.16 51.15%
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Solution Summary
The problem set deals with issues under finance: Required rate of return and risk premium.
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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