1) You are considering three stocks with the following expected dividend yields and capital gains:
DIVIDEND YIELD CAPITAL GAIN
A 14% 0%
B 8% 6%
C 0 14%
A) What is the expected return on each stock?
B) How many transactions costs and capital gains taxes affect your choices among the three securities?

3. You are given the following information concerning two stocks:
A B
Expected Return 10% 14%
Standard deviation of the expected return 3.0% 5.0%
Correlation coefficient of the returns -.1%

a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B?
b) What is the standard deviation of this portfolio?
c) Discuss the risk and return associated with investing (a) all your funds in stock A, (b) all your funds in stock B, and (c) 40 percent in A and 60 percent in B. (This answer must use the numerical information in your answers derived above.)

5. What is the beta of a portfolio consisting of one share of each of the following stocks given their respective prices and beta coefficients?
Stock Price Beta
A $10 1.4
B $24 0.8
C $41 1.3
D $19 1.8
How would the portfolio beta differ if (a) the investor purchased 200 shares of stocks B and C for every 100 shares of A and D and (b) equal dollar amounts were invested in each stock?

6. What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock's beta is 1.5? If the beta had been 2.0, what would be the return? Is this higher return consistent with the portfolio theory?

Solution Summary

Stock Expected Returns, Risk (standard deviation) of a portfolio etc. have been calculated.

... would affect stocks' prices and earned rates of return, (b) how ...risk premiums as measured by the historical difference between returns on stocks and returns...

... measure of risk than a stock's standard deviation of possible returns? 15. What interest rate, compounded monthly will yield the same rare of return as 6 ...

... the average return, and the standard deviation of returns for each stock. Which stock has the highest expected return and which one has the highest risk? ...

... systematic risks, they will have greater expected returns. The Capital Asset Pricing Model (CAPM) is a theory of risk and return for securities (stocks) on a ...

...Stocks offer the chance of higher returns, but, as we ... in speculative stocks (or, really, any stock), you are ...risk in the hope of making an appreciable return. ...

... Use an assumed market risk premium of 7.5%. ... use the CAPM to calculate IBM's required rate of return or ks ... 4. Use the CGM to find the current stock price for IBM ...

... premium is 5%. Research a current stock and determine its ...risk-free rate and its expected returns within the ... The required rate of return however is the minimum ...

... rate (rRF) is 7 percent and the expected return on the ... equation for the SML and the expected returns from the data in the table, which stocks appear to be ...

... a stock that has the highest expected return and at ... and real 'bargains' (stocks that have higher returns and lower ... in this example, can you find such a stock? ...

... Projects that are accepted will all have returns less than ... determined that the required rate of return, using the ... French three factor model, for a stock is 11.0 ...