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evaluating the expected performance of two common stocks

What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Expected return %

b-1. What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places.)

Variance of this portfolio

b-2. What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Standard deviation %

Sheet8

Problem 11-10

Fill in the missing information in the following table. Assume that Portfolio AB is 60 percent invested in Stock A. (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Annual Returns on Stocks A and B

Year Stock A Stock B Portfolio AB

2009 14 % 24 % %

2010 35.8 % –36.2 % %

2011 –18.6 % 46.2 % %

2012 25.4 % 16.6 % %

2013 14.2 % 25.8 % %

Average return % % %

Standard deviation % % %

Sheet9

Problem 11-11

Given the following information, calculate the expected return and standard deviation for a portfolio that has 45 percent invested in Stock A, 44 percent in Stock B, and the balance in Stock C. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Returns

State of Probability of

Economy State of Economy Stock A Stock B Stock C

Boom 0.7 14 % 23 % 24 %

Bust 0.3 15 0 –15

Expected return %

Standard deviation %

Sheet10

Problem 12-1

A stock has an expected return of 14.9 percent, the risk-free rate is 3.3 percent, and the market risk premium is 8.5 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Beta

Sheet11

Problem 12-2

A stock has an expected return of 12.6 percent, its beta is 1.30, and the risk-free rate is 2.5 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Expected return %

Sheet12

Problem 12-3

A stock has an expected return of 12.4 percent, a beta of 1.30, and the expected return on the market is 11.30 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Risk-free rate %

Sheet13

Problem 12-4

A stock has a beta of 1.3 and an expected return of 15.0 percent. If the risk-free rate is 2.8 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Market risk premium %

Sheet14

Problem 12-5

You own a stock portfolio invested 20 percent in Stock Q, 33 percent in Stock R, 45 percent in Stock S, and 2 percent in Stock T. The betas for these four stocks are 1.5, .5, 1.6, and .8, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

Portfolio beta

Sheet15

Problem 12-7

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.47, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Beta

Sheet16

Problem 12-8

A stock has a beta of .55, the expected return on the market is 13 percent, and the risk-free rate is 3.20 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Expected return %

Sheet17

Problem 12-10

A stock has a beta of 1.0 and an expected return of 14 percent. A risk-free asset currently earns 4.5 percent.

a. What is the expected return on a portfolio that is equally invested in the two assets? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Expected return %

b. If a portfolio of the two assets has a beta of .85, what are the portfolio weights? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Portfolio Weight

xS %

xrf %

c. If a portfolio of the two assets has an expected return of 9.25 percent, what is its beta? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Beta

d. If a portfolio of the two assets has a beta of 1.36, what are the portfolio weights? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Porfolio Weight

xS %

xrf %

Sheet18

Problem 12-11

Asset W has an expected return of 16.0 percent and a beta of 1.45. If the risk-free rate is 3.2 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Market risk premium %

Sheet19

Problem 12-13

Stock Y has a beta of .97 and an expected return of 14.35 percent. Stock Z has a beta of .70 and an expected return of 11 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Risk-free rate %

Sheet20

Problem 12-15

Suppose you observe the following situation:

Security Beta Expected Return

Peat Co. 1.10 10.8

Re-Peat Co. .85 9.4

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Expected return %

Risk-free rate %

Sheet21

Problem 12-21

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.2 percent, the expected return on the market is 12.2 percent, and the betas of the two stocks are 1.4 and .9, respectively. Stevens’s own forecasts of the returns on the two stocks are 16.40 percent for Furhman Labs and 11.20 percent for Garten.

1 Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Stock Required Return

Furhman Labs %

Garten Testing %

2 Is each stock undervalued, fairly valued, or overvalued?

Furhman Labs

Undervalued

Fair valued

Overvalued

Garten Testing

Undervalued

Fair valued

Overvalued

Sheet22

Problem 12-6

You own 500 shares of Stock A at a price of $65 per share, 445 shares of Stock B at $85 per share, and 400 shares of Stock C at $42 per share. The betas for the stocks are .7, 1.9, and .8, respectively. What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimalplaces.)

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