FIN500 Week Three Homework Assignment

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Description

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.

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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