Problem 1: Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate expected return of this investment?
Problem 2: Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, which of the following statements is true?
- You would invest more in Stock A than you would invest in Stock B
- You would invest approximately $96,000 in Stock A and $154,000 in Stock B
- You would invest the same amount in each stock
- Regardless of your investment choices, you cannot obtain a return of 12%.
Problem 3: The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the beta of Stock I and II respectively?
- 0.6 and 1.2
- 1.2 and 0.6
- 1.2 and 0.4
- Cannot be determined with the information given
Problem 4: Which statements are true regarding risk? Select all that apply:
- The expected return is usually not the same as the actual return
- A key to assessing risk is determining how much risk an investment adds to a portfolio
- Some risks cannot be decreased or mitigated by the financial manager.
- The higher the risk, the higher the return investors require for the investment