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I have homework and discussion questions for the week..Let me know if you can do this for me! Thanks.
The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?
The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore?
Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective?
Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year?
The expected return on Bevo stock is 12.6 percent. If the expected return on the market is 10 percent and the beta for Bevo is 1.4, then what is the risk-free rate?
Problem 7.15
| Session 5 Discussion Questions |
7.15 Calculating the variance and standard deviation: Kate recently invested in real estate with the intention of selling the property one year from today. She has modeled the returns on that investment based on three economic scenarios. She believes that if the economy stays healthy, then her investment will generate a 30 percent return. However, if the economy softens, as predicted, the return will be 10 percent, while the return will be –25 percent if the economy slips into a recession. If the probabilities of the healthy, soft, and recessionary states are 0.4, 0.5, and 0.1, respectively, then what are the expected return and the standard deviation for Kate’s investment?
Problem 7.20
| Probability | Return(A) | Return(B) | ||
| Good | 0.35 | 0.30 | 0.50 | |
| OK | 0.10 | |||
| Poor | 0.15 | -0.25 | -0.30 |
7.20 Portfolios with more than one asset: Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of
and
. For convenience, assume that the expected returns of Stock A and Stock B are 11.75 percent and 18 percent, respectively.
Exercise 7.22
| Rate of Return if State Occurs | |||
| State of the Economy | Probability of State of the Economy | ||
| Boom | 60% | 9% | 15% |
| Recession | 40% | 4% | -6% |
| 0.02623 |
7.22 You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why? Calculate expected return and standard deviation for each stock, and base your choice on return/risk characteristics.
Exercise 7.24
Session 5 Discussion Questions
7.24 Hatter Enterprise paid a dividend last year of $3.25, which is expected to grow at a constant rate of 7%. Hatter has a beta of 1.5 and their stock is currently selling for $62. If the market risk premium is 6% and the risk-free rate is 3%, should you purchase Hatter’s stock? Why or Why not? Show by comparing the current selling price to an “equilibrium” price (based on CAPM) of Hatter.
