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Compute the abnormal rates of return

1. Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):

Stock Rit Rmt

B 11.5% 4.0%

F 10.0 8.5

T 14.0 9.6

C 12.0 15.3

E 15.9 12.4

Rit = return for stock i during period t

Rmt = return for the aggregate market during period

2. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following systematic risk measures (betas):

Stock βi

B 0.95

F 1.25

T 1.45

C 0.70

E -0.30

3. Considering the world economic outlook for the coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range between -20 percent and +40 percent with the following probabilities:

Probability Possible Returns

0.10 -0.20

0.15 -0.05

0.20 0.10

0.25 0.15

0.20 0.20

0.10 0.40

Compute the expected rate of return E(Ri) for Lauren Labs.

4. Given the following market values of stocks in your portfolio and their expected rates of return, what is the expected rate of return for your common stock portfolio?

Stock Market Value ($Mil.) E(Ri)

Disney $15,000 0.14

Starbucks 17,000 -0.04

Harley Davidson 32,000 0.18

Intel 23,000 0.16

Walgreens 7,000 0.12

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## Q : Computing new expected rate of return

ABC Corporation's stock had expected return of 11.75% last year, when the risk free rate was 5.50% and the MARKET RISK PREMIUM was 4.75%. Then an increase in investor risk aversion caused the MARKET RISK PREMIUM to rise by 2%.