11 Jan Assume that the market

1.

Compute the expected return given these three economic states, their likelihoods, and the potential returns:(Round your answer to 2 decimal places.)

Economic State

Probability

Return

Fast growth

0.21

61

%

Slow growth

0.46

40

Recession

0.33

–32

2.

Hastings Entertainment has a beta of 0.29. If the market return is expected to be 13.40 percent and the risk-free rate is 4.40 percent, what is Hastings’ required return?(Round your answer to 2 decimal places.)

3.

You have a portfolio with a beta of 1.63. What will be the new portfolio beta if you keep 91 percent of your money in the old portfolio and 9 percent in a stock with a beta of 0.60?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

4.

You have a portfolio with a beta of 1.33. What will be the new portfolio beta if you keep 88 percent of your money in the old portfolio and 12 percent in a stock with a beta of 0.56?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

5.

Suppose Paccar’s current stock price is $76.85 and it is likely to pay a $1.71 dividend next year. Since analysts estimate Paccar will have a 16.0 percent growth rate, what is its required return?(Round your answer to 2 decimal places.)

6.

Following are three economic states, their likelihoods, and the potential returns:

Economic State

Probability

Return

Fast growth

0.26

35

%

Slow growth

0.39

7

Recession

0.35

–20

Determine the standard deviation of the expected return.(Round your answer to 2 decimal places.)

7.

A manager believes his firm will earn a 12.98 percent return next year. His firm has a beta of 1.38, the expected return on the market is 11.10 percent, and the risk-free rate is 5.10 percent.

Compute the return the firm should earn given its level of risk.(Round your answer to 2 decimal places.)

Determine whether the manager is saying the firm is undervalued or overvalued.

8.

You own $15,072 of Human Genome stock that has an assumed beta of 3.83. You also own $9,106 of Frozen Food Express (assumed beta = 1.55) and $7,222 of Molecular Devices (assumed beta = 0.74).

What is the beta of your portfolio?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

9.

Following are four economic states, their likelihoods, and the potential returns:

Economic State

Probability

Return

Fast growth

0.32

69

%

Slow growth

0.56

28

Recession

0.07

–20

Depression

0.05

–54

Compute the expected return and standard deviation.(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

10.

You hold the positions in the table below.

Assumed
Price

Shares

Assumed
Beta

Advanced Micro Devices

$

22.00

443

4.56

FedEx Corp

161.00

106

1.89

Microsoft

42.00

104

0.79

Sara Lee Corp

28.00

233

0.95

What is the beta of your portfolio?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

If you expect the market to earn 15.00 percent and the risk-free rate is 4.00 percent, what is the required return of the portfolio?(Do not round intermediate calculations. Round your final answer to 2 decimal places.)

11.

You have assigned the following values to these three firms:

Price

Upcoming Dividend

Growth

Beta

US Bancorp

$

115.50

$

3.15

9.00

%

1.42

Praxair

57.10

1.18

14.50

2.14

Eastman Kodak

27.45

1.00

9.20

1.84

Assume that the market portfolio will earn 12.70 percent and the risk-free rate is 3.40 percent.

Compute the required return for each company using both CAPM and the constant-growth model.(Do not round intermediate calculations. Round your final answer to 2 decimal places.)