1. A portfolio’s returns are forecasted to have the following distribution:
Demand for the Prob of Demand occurring
companys products Rate of return if this demand occurs
Weak 20% -12%
Average 50% 11%
Strong 30% 17%
Calculate the expected return of the portfolio.
2. You have decided to invest $70,000 in Stock Fund, and $30,000 in Bond. The returns for each fund are forecasted below: Fill in the portfolio’s forecasted return for a strong economy and a weak economy. Then calculate the expected return for the portfolio.
Economy (Probalility) Stock Fund Return Bond Fund Return Portfolio Return
Strong (65%) 16% 2% ___________________
Weak (35%) -12% 7% __________________
Expected return portfolio_______________
3. Assume that the risk-free rate is 1.4% and the market risk premium is 7.5%.
What is the required return for a stock that has a beta of .8?
What is the required return for a stock that has a beta of 1.2?