# Finance Questions and Problems

1. The probability distribution of a less risky return is more peaked than that of a riskier return. What Shape would the probability distribution have for (a) completely certain returns and (b) completely uncertain return?

2. Suppose you owned a portfolio consisting of $250,000 of US gov bonds with a maturity of 30 years

a.would your portfolio be riskless?

b.now suppose you hold a portfolio consisting of $250,000 of 30 day treasury bills. Every 30 days your bills mature, and you reinvest the principal in a new batch of bills

is your portfolio truly risk less?

3. If a company beta were to double, would its expected return double?

4. In the real world,is it possible to construct a portfolio of stocks that has an expected return equal to the risk-free rate?

5.An individual has $35,000 invested in a stock with a bet of 0.8 and another $40,000 invested in a stock with a beta 1.4. If these are the only two investments in her portfolio, what is her portfolio beta

6. Assume that the risk rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7

7. The market and stock j have the following probability distributions

probability Rm rj

0.3 15% 20%

0.4 9 5

0.4 18 12

a- calculate the expected rates of return for the market and stock j

b-calculate the standard deviations for the market and stock j

c-calculate the coefficients of variations for the market and stock j

8. Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolios beta is 1.12. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 1.75. Calculate the new beta of the portfolio.

#### Solution Preview

Hi,

Answer:

1) We have,

(a) The probability distribution for a completely certain return will be a single line parallel to the y-axis of probability distribution.

(b) The probability distribution for completely uncertain stock is flat and not steep peaked as the risk is higher.

2) We have,

(a) No the portfolio is not completely risk free as it includes the maturity risk and reinvestment risk.

(b) $250,000 30 days Treasury bill is completely risk free because ...

#### Solution Summary

This solution provides a detailed, step by step calculation of the given finance problem.