1) The markets in general are paying a 3% real rate of return. Inflation is expe
ID: 2720608 • Letter: 1
Question
1) The markets in general are paying a 3% real rate of return. Inflation is expected to be 2%. ABC stock commands a 6% risk premium. What is the risk-free rate of return?
2) An investment produced annual rates of return of 5%, 12%, 8%, and 11% repectivly over the past four years. What is the standard deviation of these returns?
3) What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk-free rate of 4%?
4) The risk free rate of return is 4% while the market rate of return is 11%. Delta Company has a historical beta of 1.25. Today, the beta for Delta Company was adjusted to reflect internal changes in the structure of the company. The new beta is 1.38. What s the amount of the change in the expected rate of retun for Delta Company based on this revision to beta?
5) Dr. Zweibel's protfolio consists of four stocks: AZMN, 35%, beta 2.4; MKR, 20%, beta 1.6; ABDE, 25%, beta 1.8; and SBUK, 20%, beta 2.1. Compute Dr. Z's protfolio beta. Does he seem to be a conservative or aggressive investor?
6) Assume that an investor generates the following income stream and can be purchased at the beginning of 2009 for $1000 and sold at the end of 2015 for $1200. Estimate the yield for this investment. If a minimum return of 9% s required, would you recommend this investment? Explain.
Explanation / Answer
Answer: Nominal risk-free rate = (1 + risk-free rate) x (1 + rate of inflation) - 1
3%=(1+x)*(1.02)-1
1+3%=(1+x)*1.02
1.03/1.02=1+x
X=0.980%
Answer:2 Average Return=(5%+12%+8%+11%)/4=9%
SD=[(5%-9%)^2+(12%-9%)^2+(8%-9%)^2+(11%-9%)^2)/4-1]1/2
=[16%+9%+1%+4%/3]1/2
=3.16%
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