1) Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Economic State	Probability			Return
Fast Growth		0.40				50	%
Slow Growth		0.40				10	%
Recession		0.10				10	%
Depression		0.10				5	%

A) 6.71 percent

B) 22.5 percent

C) 23.37 percent

D) 52.20 percent

2) Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Economic State	Probability			Return
Fast Growth		0.20				100	%
Slow Growth		0.50				10	%
Recession		0.20				1	%
Depression		0.10				10	%

A) 12.19 percent

B) 23.8 percent

C) 38.65 percent

D) 88.06 percent

3) Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10 percent for the foreseeable future. Compute Praxair's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.

A) CAPM: 8.6 percent; Constant Growth Model: 13.46 percent

B) CAPM: 9.7 percent; Constant Growth Model: 12.56 percent

C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent

D) CAPM: 8.2 percent; Constant Growth Model: 9.56 percent

4) Estee Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45. The firm has a beta of 1.1 and is expected to grow at 10 percent for the foreseeable future. Compute Estee Lauder's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.

A) CAPM: 11.2 percent; Constant Growth Model: 10.97 percent

B) CAPM: 11.7 percent; Constant Growth Model: 11.44 percent

C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent

D) CAPM: 9.2 percent; Constant Growth Model: 9.56 percent

5) A company's current stock price is $50.00 and its most recent dividend was $1.00 per share. Since analysts estimate the company will have a 5 percent growth rate, what is its expected return?

A) 2.20 percent

B) 5.02 percent

C) 7.00 percent

D) 7.10 percent

6) ABC Inc. has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years. What is ABC's required return?

A) 17.0 percent

B) 7.0 percent

C) 6.7 percent

D) 2.4 percent

7) You own $7,000 of Diner's Corp. stock that has a beta of 1.75. You also own $13,000 of Comm Corp. (beta = 1.15) and $20,000 of Airlines Corp. (beta = 0.7). Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent. What is the total risk premium of the portfolio?

A) 8.76 percent

B) 8.86 percent

C) 10.20 percent

D) 12.36 percent

8) You hold the positions in the following table. If you expect the market to earn 10 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?

	Price			Shares			Beta
Website.com	$	25.00			100				2.72
Budget Stores	$	38.50			200				1.65
Manufacturing Corp.	$	52.00			50				2.30
Pharmacy Corp.	$	18.50			200				0.65

A) 14.83 percent

B) 15.81 percent

C) 28.67 percent

D) 32.83 percent