# Finance Questions

2-3 Assume that a risk-free rate is 6% and the market risk premium is

6%. What is the expected return for the overall stock market?

What is the required rate of return on a stock that has a beta of 1.2?

2-4 Assume that the risk-free rate is 6% and the expected rate of return

on the market is 13%. What is the required rate of return on a

stock that has a beta of 0.7?

2-7 Suppose rRF =14%, and b1 = 1.3.

a. What is the ri, the required rate of return on Stock i?

b. Now suppose rRF (1) increases to 10 per cent or (2) decreases to 8

percent. The slope of the SML remains constant How would this

affect rM and ri??

c. Now assume rRF remains at 9 percent but rM (1) increases to 16

percent or (2) falls to 13 percent. The slope of the SML does not

remain constant. How would these affect ri?

2-9 Suppose you are the money manager of a $4 million investment

fund. The fund consists of 4 stocks with the following investments

and betas:

Stock Investments Beta

_______________________________________________

A S 400,000 1.5

B 600,000 (0.50)

C 1,000,000 1.25

D 2,000,000 0.75

If the market required rate of return is 14 percent and the risk-free

rate is 6%, what is the fund's required rate of return?

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#### Solution Preview

2-3 Assume that a risk-free rate is 6% and the market risk premium is

6%. What is the expected return for the overall stock market?

What is the required rate of return on a stock that has a beta of 1.2?

rs = rf + (rm - rf)b where rs is the stock's required rate of return

rm is the market required rate of return

rf is the risk free rate

b is the beta

Please note that (rm - rf) is equal to the market risk premium, and rf is equal to real inflation-free rate of return or Treasury bill rate

rs = 0.06 + (0.06)1.2

rs = 0.132 or 13.20%

If rf is equal to 0.06, then rm will be equal to 0.12.

2-4 Assume that the risk-free rate is 6% and the expected rate ...

#### Solution Summary

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