Levine Inc. is considering an investment that has an expected return of 15% and

Question

Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation? Answer 0.67 0.73 0.81 0.89 0.98

Explanation / Answer

Q6. Coefficient of Variation = std.dev./mean mean = expected return CV = 10/15 = 0.666666 ~0.67 Q7. CAPM: E(R) = Rf + Beta(E(Rm) - Rf) 12,25 = 5 + 1,25(Rm - 5) 7.25 = 1,25Rm - 6,25 Rm = (7,25 + 6,25)/1,25 = 10,8 Market Risk Premium = Expected return of the market - Riskfree Rate = E(Rm) - Rf = 10,8 - 5 = 5,8 % Q8. Portfolio Beta = Weighted average of the stock's Beta's --> 50 000/200 000 = 0,25 (0,25 * 0,95) + (0,25 * 0,8) + (0,25 * 0,1) + (0,25 * 1,2) = 0,9875 ~0,988 Q9. Same principle: With stock A: ((150 000/375 000) * 1,4) + ((50 000/375 000) * 0,8) + ((100 000/375 000) * 1) + ((75 000/375 000) * 1,2) = 88/75 (=1,17333..) Replace with stock E: ((150 000/375 000) * 0,75) + ((50 000/375 000) * 0,8) + ((100 000/375 000) * 1) + ((75 000/375 000) * 1,2) = 137/150 (=0,91333...) Difference = (137/150) - (88/75) = -0,260 Q10. CAPM: E(R) = Rf + Beta(E(Rm) - Rf) Stock A: E(Ra) = 4,25 + 0,7(11 - 4,25) E(Ra) = 4,25 + 0,7(6,75) E(Ra) = 8,975 % Stock B: E(Rb) = 4,25 + 1,2(11 - 4,25) E(Rb) = 4,25 + 1,2(6,75) E(Rb) = 12,35 % Difference: 12,35 - 8,975 = 3,375 ~3,38 %

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