1.8 Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.3% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 6.0%. Mudd has a beta of 1.7, and its realized rate of return has averaged 10.0% over the past 5 years. Round your answer to two decimal places.

%

3.8 A stock has a required return of 15%, the risk-free rate is 4.5%, and the market risk premium is 5%.

- What is the stock’s beta? Round your answer to two decimal places.
- If the market risk premium increased to 7%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.
- If the stock’s beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
- If the stock’s beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
- If the stock’s beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.
- If the stock’s beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
- If the stock’s beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
**-Select-IIIIIIIVVItem 2**

Stock’s required rate of return will be %.

4.8 You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

**StockInvestmentStock’s Beta Coefficient**A$160 million0.3B120 million1.5C80 million1.8D80 million1.0E60 million1.5

Kish’s beta coefficient can be found as a weighted average of its stocks’ betas. The risk-free rate is 5%, and you believe the following probability distribution for future market returns is realistic:

**ProbabilityMarket Return**0.1-28%0.200.4130.2290.148

- What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
- ri = 5.0% + (7.1%)bi
- ri = 3.2% + (8.0%)bi
- ri = 3.2% + (7.1%)bi
- ri = 5.0% + (8.0%)bi
- ri = 8.5% + (8.1%)bi
**-Select-IIIIIIIVVItem 1**

- Calculate Kish’s required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.

% - Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 15%, and its estimated beta is 1.5. Should Kish invest in the new company?The new stock
**-Select-should notshouldItem 3**be purchased.

At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.

%

7.8 Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 20% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

- Calculate each stock’s coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places.

CVx =

CVy = - Which stock is riskier for a diversified investor?
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock Y has the higher beta so it is riskier than Stock X.
- For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is riskier. Stock X has the higher standard deviation so it is riskier than Stock Y.
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y.
- For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is riskier. Stock Y has the lower standard deviation so it is riskier than Stock X.
**-Select-IIIIIIIVVItem 3**

- Calculate each stock’s required rate of return. Round your answers to one decimal place.

rx = %

ry = % - On the basis of the two stocks’ expected and required returns, which stock would be more attractive to a diversified investor?
**-Select-Stock XStock YItem 6** - Calculate the required return of a portfolio that has $4,500 invested in Stock X and $1,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.rp = %
- If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

**-Select-Stock XStock Y**

**9.8 **A stock’s returns have the following distribution:

**Demand for the**

**Company’s ProductsProbability of This**

**Demand OccurringRate of Return If**

**This Demand Occurs**Weak0.1(22%)Below average0.1(12) Average0.313 Above average0.331 Strong0.257 1.0

Assume the risk-free rate is 2%. Calculate the stock’s expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock’s expected return: %

Standard deviation: %

Coefficient of variation:

Sharpe ratio:

10.8 Assume that the risk-free rate is 2.5% and the market risk premium is 5%. What is the required return for the overall stock market? Round your answer to one decimal place.

%

What is the required rate of return on a stock with a beta of 0.8? Round your answer to one decimal place.

%