# Finance Problems: Investments

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1) Stock A has the following probability distribution of expected returns. What is Stock A's expected rate of return and standard deviation?

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Probability________Rate of Return

0.1.............................-15%

0.2.................................0

0.4................................5

0.2............................10

0.1............................25

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2) If rRF = 5%, rM=11%, and b=1.3 for Stock X, what is rX, the required rate of return for Stock X?

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3) Refer to Problem #2 above, What would rX be if investors expected the inflation rate to increase by 2 percentage points?

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4) Refer to Problem #2 above, What would rX be if an increase in investors' risk aversion caused the market risk premium to increase by 3 percentage points? RRF remains at 5 percent.

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5) Refer to Problem #2 above, What would rX be if investors expected the inflation rate to increase by 2 percentage points and their risk aversion increased by 3 percentage points?

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6) You own a 3-stock portfolio with a total investment value equal to $300,000. What is the weighted average beta of your 3-stock portfolio?

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Stock_____Investment (Thousands)______Beta

A.........................$100..............................0.5

B..........................100...............................1.0

C..........................100...............................1.5

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7) The Magnolia Investment Fund that you manage has a total of investment of $450 million in five stocks. What is the fund's overall, or weighted average beta?

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Stock______Investment (Millions)_______Beta

1.........................$130.............................0.4

2..........................110..............................1.5

3............................70..............................3.0

4.........................90..........................2.0

5.........................50..........................1.0

TOTAL...............$450

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8) Refer to Problem #7. If the risk-free rate is 12 percent and the market risk premium is 6 percent, what is the required rate of return on Magnolia Fund?

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9) You are managing a portfolio of 10 stocks, which are held in equal dollar amounts. The current beta of the portfolio is 1.8, and the beta of Stock A is 2.0. If Stock A is sold and the proceeds are used to purchase a replacement stock, what does the beta of the replacement stock have to be to lower the portfolio beta to 1.7?

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This solution answers finance problems regarding investments.

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