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    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?
    .
    Probability________Rate of Return
    0.1.............................-15%
    0.2.................................0
    0.4................................5
    0.2............................10
    0.1............................25
    .
    2) If rRF = 5%, rM=11%, and b=1.3 for Stock X, what is rX, the required rate of return for Stock X?
    .
    3) Refer to Problem #2 above, What would rX be if investors expected the inflation rate to increase by 2 percentage points?
    .
    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.
    .
    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?
    .
    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?
    .
    Stock_____Investment (Thousands)______Beta
    A.........................$100..............................0.5
    B..........................100...............................1.0
    C..........................100...............................1.5
    .
    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?
    .
    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
    .
    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?
    .
    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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    Solution Summary

    This solution answers finance problems regarding investments.

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