Corporate Finance – RISK, RETURNS AND THE CAPITAL ASSET PRICING MODEL

1) The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?

2) What is the beta of the following portfolio?

Stock Amount invested (RM) Security beta
A 14,200 1.39
B 23,900 0.98
C 8,400 1.52

3) Damia is planning to invest into HD stock. The stock has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. If she is looking for a stock that give him a return of at least 15 percent, should she invest in this stock?

4) What is the standard deviation of the returns on a stock given the following information?

State of

Economy

Probability of

State of Economy

Rate of Return

if State Occurs

Boom .28 .175
Normal .67 .128
Recession .05 .026

5) What is the expected return on a portfolio comprised of RM9,750 of Stock X and RM4,520 of Stock Y if the economy enjoys a boom period?

State of

Economy

Probability of

State of Economy

Rate of Return

if State Occurs

Stock X Stock Y
Boom .25 .108 .156
Normal .65 .087 .097
Recession .10 .024 .069
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