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what is the market risk premium

Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

State of Probability of Portfolio Return Product

Economy State of Economy If State Occurs

Bust .60 % %

Boom .40 % %

E(RP) = %

Sheet6

Problem 11-8

Consider the following information:

Rate of Return If State Occurs

State of Probability of

Economy State of Economy Stock A Stock B

Recession 0.25 0.05 –.11

Normal 0.55 0.12 0.16

Boom 0.2 0.16 0.36

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

Expected return for A %

Expected return for B %

b. Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

Standard deviation for A %

Standard deviation for B %

Sheet7

Problem 11-9

Consider the following information:

Rate of Return if State Occurs

State of Probability of

Economy State of Economy Stock A Stock B Stock C

Boom .25 .23 .47 .22

Good .15 .15 .19 .12

Poor .30 –.06 –.14 .01

Bust .30 –.14 –.34 –.11

a. Your portfolio is invested 35 percent each in A and C, and 30 percent in B. 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.)

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