Explore BrainMass
Share

# Risks and Returns

Problem 6-1
Phoenix Company common stock is currently selling for \$20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:

Price Rate of Return Probability
\$16 -20% 0.25
20 0% 0.30
24 +20% 0.25
28 +40% 0.20

Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.

Problem 6-2
Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp. Assume the following conditions exist.

Return on the market = 13%
3 month Treasury bill rate = 6%
Acton 's beta = 1.15
Boron's beta = 1.40
Market value of Ken's investment in Acton = \$125,000
Market value of Ken's investment in Boron = \$250,000
\$375,000

What does the SML predict is Ken's required rate of return for the overall portfolio?

#### Solution Preview

Problem 6-1
Phoenix Company common stock is currently selling for \$20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:

Price Rate of Return Probability
\$16 -20% 0.25
20 0% 0.30
24 +20% 0.25
28 +40% 0.20

Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected ...

#### Solution Summary

This solution is comprised of a detailed explanation to determine the expected rate of return on Phoenix Stock and answer what does the SML predict is Ken's required rate of return for the overall portfolio.

\$2.19