1. Given the following data for a stock: beta = 1; risk-free rate = 4%; market premium = 6%. Calculate the expected rate of return on this stock using the capital asset pricing model.
2. A portfolio is made up of 25% of stock 1, and 75% of stock 2. Stock 1 has a variance of 0.08, and stock 2 has a variance of 0.035. The covariance between the stocks is -0.001. Calculate the standard deviation of the portfolio.
3. Virtualfriend.com, a 100% equity-financed social media company plans to diversify. More specifically, it intends to purchase a chain of gyms in order to allow its members to meet in real life in a friendly setting. The beta of Virtualfriend.com is 2.00. The average beta of publicly quoted gyms is 1.15. The risk free interest rate is 4%, and the expected market return is 7%. What is the cost of capital of this project?
4. In question 11, assume that the gym purchase is associated with a cash outflow, at time 0, of £1,000,000, and an expected perpetual incremental cash inflow as of t=1 of £100,000. What is the NPV of this purchase?