Problem: You are considering a security with the following possible rates of return:
Probability Return (%)
0.30 9.5
0.15 12.0
0.25 15.0
0.30 16.0
Question 1: Calculate the expected rate of return and the standard deviation of the returns.
Probability Return (%)
0.15 6
0.30 5
0.40 11
0.15 14
Question 2: Calculate the expected rate of return and its standard deviation. One year Treasury bills are currently paying 8.9%. Should you invest in the above security?
Question 3: GAC Manufacturing, Inc. is considering several investments. The rate on T-Bills is currently 6.75 percent, and the expected return for the market is 12 percent. What should be the required rates of return for each investment (Using the CAPM)? 12 points.
Security Beta
A 1.40
B 0.75
C 0.80
D 1.20