Calculating the stock expected return

Question 1: EXPECTED RETURN

A stock’s returns have the following distribution:

Demand for the       Probability of    Rate of return if
Company's products   this occurring    this demand occurs

Weak                         10%               -50%
Below average            20%                -5%
Average                      40%                16%
Above average            20%                25%
Strong                        10%                60%

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

Question 2: REQUIRED RATE OF RETURN

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

Question 3: BETA AND REQUIRED RATE OF RETURN

A stock has a required return of 11%, the risk- free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk- free rate and the beta remain unchanged.

Question 4: PORTFOLIO REQUIRED RETURN

Suppose you are the money manager of a \$ 4 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock  Investment  Beta

A       \$400,000   1.50
B       \$600,000  -0.50
C     \$1,000,000   1.25
D     \$2,000,000   0.75

If the market’s required rate of return is 14% and the risk- free rate is 6%, what is the fund’s required rate of return?

Question 5: CAPM AND REQUIRED RETURN

Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk- free rate is 2.5%, and the market risk premium is 6.5%. Manning has a beta of 1.7, and its realized rate of return has averaged 13.5% over the past 5 years.

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