1) Compute the expected return given these three economic states, their likelihoods,and the potential returns:(Round your answer to 2 decimal places. Omit % sign)

Economic State	Probability		Return
Fast growth	0.31		48	%
Slow growth	0.53		17
Recession	0.16		-31

2) If the risk-free rate is 4.20 percent and the risk premium is 3.2 percent, what is the required return?(Round your answer to 1 decimal place. Omit % sign)

3) The average annual return on the S&P 500 Index from 1986 to 1995 was13.80 percent. The average annual T-bill yield during the same period was 5.10 percent.

What was the market risk premium during these ten years?(Round your answer to 2 decimal places. Omit % sign))

4) Hastings Entertainment has a beta of 0.39. If the market return is expected to be 15.60 percent and the risk-free rate is 7.60 percent, what is Hastings' required return?(Round your answer to 2 decimal places. Omit % sign)

5) You have a portfolio with a beta of 1.24. What will be the new portfolio beta if you keep 86 percent of your money in the old portfolio and 14 percent in a stock with a beta of 0.63?(Round your answer to 2 decimal places. Omit % sign)

6) A manager believes his firm will earn areturn of 17.80 percent next year. His firm has a beta of 1.54, the expected return on the market is 11.50 percent, and the risk-free rate is 3.50 percent.

Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places. Use % sign)

Determine whether the manager is saying the firm is undervalued or overvalued

7) You have assigned the following values to these three firms:

	Price		Upcoming Dividend		Growth		Beta
US Bancorp	$	29.80				$	3.20				8.80	%		1.59
Praxair		59.15					1.51				13.00			2.20
Eastman Kodak		36.50					1.00				11.50			0.98

Assume that the market portfolio will earn 15.50 percent and the risk-free rate is 5.70 percent.

Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places. Use % sign)

CAPM

US Bancorp

Praxair

Eastman Kodak

Constant-Growth Model

US Bancorp

Praxair

Eastman Kodak