Problem 1: Suppose you are the money manager of a 4 million investment fund. The fund consists of four stocks with the following investments and betas:
Stock Investment Beta
A 400,000 1.50
B 600,000 (0.50)
C 1 million 1.25
D 2 million 0.75
If the market's required rate of return is 14% and the risk free rate is 6%, what is the funds required rate of return?
Problem 2: Bradford Manufacturing has a beta of 1.45, while Farley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 12.0%. The risk free rate of interest is 5%. By now how much does Bradford's required return exceed Farleys required return?
Problem 3: r(RF) = risk free rate of return; r(M) = required rate of return on a portfolio
b(i)= beta coffecient of the ith stock
Required Rate of Return : suppose r(RF) = 9%, r(M) = 14% and b(i)= 1.3
a) What is r(i) , the required rate of return on Stock i?
b) Now suppose r(RF) 1 increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect r(M) and r(i)?
c) Now assume r(RF) remains at 9% but r(M)(1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect r(i)?