1) An analyst for ABC company has developed the following distribution for the next year: State of the economy Probability Stock’s Return Mild Recession 25% -9% Moderate growth 55% 11% Expansion 20% 16% What is the expected return of ABC stock for the next year based on the analyst’s forecasts? Expected return = __________7%__________%_
2) The current risk-free rate is 2%. The market risk premium is 7%. Company XYZ has a beta equal to 1.2.
a) What is the expected (required) rate of return on the stock market? Required Rate of Return on the Stock Market =_______9%____________
b) What is the required rate of return for XYZ? Required Rate of Return for XYZ=______________10.4% ________
3) Calculate the required rate of return for CC Company assuming that the Investors expect the stock market to return 11% and Treasury Bills to earn 3%. Company CC has a beta of 0.7. Required rate of return = _____8.6% _______________
4) BB company has a beta of 1.6, ZZ company has a beta of 0.9. The market risk premium is 7.3%. The current risk-free rate is 3.2%. By how much does BB company’s required return exceed ZZ company’s required return? BB’s required return is ___5.11% ____________% more than ZZ’s required return.
5) We have a portfolio that is invested 70% in Asset A and 30% in Asset B. Assume the following State of the Econ . Probability Exp.Ret (Asset A) Exp. Ret (Asset B) Recession 40% -4% 2% Expansion 60% 16% 6% Calculate the Return of the portfolio under each of the given states of the economy State of the Econ. Probability Return of the Portfolio containing 70% in A and 30% in B Recession 40% _______-2.2% _________% Expansion 60% _______13% _________%
What is the overall Expected return of the portfolio? Expected Return on the Portfolio = ___________ 6.92% ______________%
What is the standard deviation of the $10,000 portfolio? Standard Deviation of the $10,000 portfolio = _____ 7.446% ___________%