3) On a risk/return basis, rank order the following asset classes from lowest to
ID: 2765736 • Letter: 3
Question
3) On a risk/return basis, rank order the following asset classes from
lowest to highest based on the following data. (a) Small stocks: E(r) =
18.15% and standard deviation = 36.94%; (b) Large stocks: E(r) =
11.50% and standard deviation = 20.14%; (c) US Treasury bonds:
E(r) = 5.45% and standard deviation = 8.06%; How would this rank
order change if the return for each class [i.e., the E(r)] were each
reduced by a 3% inflation factor?
4) If a stock's Beta is 1.25, and the average market return for the
stock is 12%, and the interest yield on 10-year US Treasury Bonds is
4%, what is the required or expected rate of return?
5) If a stock's required or expected rate of return is 22%, its average
market return is 18%, and the interest yield on 10-year US Treasury
Bonds is 4%, what is the stock's Beta?
Explanation / Answer
On a risk/return basis, rank order the following asset classes from
lowest to highest based on the following data. (a) Small stocks: E(r) =
18.15% and standard deviation = 36.94%; (b) Large stocks: E(r) =
11.50% and standard deviation = 20.14%; (c) US Treasury bonds:
E(r) = 5.45% and standard deviation = 8.06%; How would this rank
order change if the return for each class [i.e., the E(r)] were each
reduced by a 3% inflation factor?
ANswer
Rank
1) US treasury Bond
2) LArge stock
3) Small Stock
When reduced by inflation
1) Small Stock
2) L:Arge stock
3) US treasury bond
If a stock's Beta is 1.25, and the average market return for the
stock is 12%, and the interest yield on 10-year US Treasury Bonds is
4%, what is the required or expected rate of return?
Ra = rf+Beta*(rm-rf)
Ra = .04+1.25*(.12-.04) =4+10 = 14%
Required or expected rate of return = 14%
If a stock's required or expected rate of return is 22%, its average
market return is 18%, and the interest yield on 10-year US Treasury
Bonds is 4%, what is the stock's Beta?
Ra = rf+Beta*(rm-rf)
22 = 4+beta*(22-4)
Beta = 1
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