1) Jerome J. Jerome is considering investing in a security that has the following distribution

of possible one-year returns:

Probability of occurrence - 0.10 - 0.20 - 0.30 - 0.30 - 0.10

Possible return 0.10 - 0.00 - 0.10 - 0.20 - 0.30

a. What is the expected return and standard deviation associated with the investment?

b. Is there much "downside" risk? How can you tell?

2) Summer Storme is analyzing an investment. The expected one-year return on the investment

is 20 percent. The probability distribution of possible returns is approximately

normal with a standard deviation of 15 percent.

a. What are the chances that the investment will result in a negative return?

b. What is the probability that the return will be greater than 10 percent? 20 percent?

30 percent? 40 percent? 50 percent?

3) Assuming that the CAPM approach is appropriate, compute the required rate of return

for each of the following stocks, given a risk-free rate of 0.07 and an expected return for

the market portfolio of 0.13:

Stock: A - B - C - D - E

Beta: 1.5 - 1.0 - 0.6 - 2.0 - 1.3

What implications can you draw?