1. What is the expected return on the market portfolio at a time when the risk free rate (e.g., T-Bill rate) is 4% and a stock with a beta of 1.5 is expected to yield 16%? What’s the risk premium for the stock.
2. A friend tells you that his investment return on a specific mutual fund has been +10%, +20%, and -25% over the last three years. He says he is happy that he made 5% on his money during this time. What concept of investment returns does he not understand?
3. A company’s equity beta is 1.2. The risk-free rate is 5% and the market risk premium is 6%. What is the company’s cost of equity?