FIN500 Week Three Homework Assignment

Question
Work should be done individually.Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables as needed.

1. The expected returns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Use the table to complete parts (a) through (c) below.

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Demand for Product

Probability of Demand

Expected Return: Stock A

Expected Return: Stock B

Strong

0.3

40%

20%

Normal

0.45

20%

5%

Weak

0.25

0%

(5%)

(a) Compute the expected rates of return for each stock.

(b) Compute the standard deviations for each stock.

(c) Compute the coefficient of variation for each stock. Based on the coefficient of variation, which stock has the higher risk for investment?

2. The expected returns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Assume a two-stock portfolio with $25,000 in Company A and $75,000 in Company B. Compute the expected return on the portfolio.

Demand for Product

Probability of Demand

Expected Return: Stock A

Expected Return: Stock B

Strong

0.3

40%

20%

Normal

0.45

20%

5%

Weak

0.25

0%

(5%)

3. Suppose you have a portfolio consisting of three stocks. You invest a total of $200,000 in the stocks. The investments and beta for the stocks are shown in the following table. Use the table to complete parts (a) through (c) below.

Stock

Investment

Beta

1

$60,000

1.25

2

$40,000

(0.5)

3

$100,000

1.5

(a) Assume the risk-free rate is 5.5% and the expected return for the market is 10%. Estimate the appropriate required rate of return for each stock.

(b) Compute the portfolio beta.

(c) Find the portfolio’s required rate of return, assuming the same risk-free rate and expected return for the market as in part (a).

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