1. EXPECTED RETURN

A stock's returns have the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring	Rate of Return If This Demand Occurs
Weak	0.1	(26%)
Below average	0.1	(8)
Average	0.4	12
Above average	0.1	31
Strong	0.3	57
	1.0

Calculate the stock's expected return. Round your answer to two decimal places. _______ %

Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. _______ %

Calculate the stock's coefficient of variation. Round your answer to two decimal places.

________

2. REQUIRED RATE OF RETURN

Assume that the risk-free rate is 6.5% and the required return on the market is 13%. What is the required rate of return on a stock with a beta of 2? Round your answer to two decimal places.

________ %

3. REQUIRED RATE OF RETURN

Suppose r_RF = 6%, r_M = 12%, and b_i = 1.8.

a) What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. ________ %

b) Now suppose r_RF increases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i?

1. r_M will increase by 1% and r_i will remain the same.
2. Both r_M and r_i will decrease by 1%.
3. Both r_M and r_i will remain the same.
4. Both r_M and r_i will increase by 1%.
5. r_M will remain the same and r_i will increase by 1

c) Now suppose r_RF decreases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i?

1. r_M will decrease by 1% and r_i will remain the same.
2. r_M will remain the same and r_i will decrease by 1%.
3. Both r_M and r_i will increase by 1%.
4. Both r_M and r_i will remain the same.
5. Both r_M and r_i will decrease by 1%.

d) Now assume that r_RF remains at 6%, but r_M increases to 13%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

The new r_i will be %.

2. Now assume that r_RF remains at 6%, but r_M falls to 11%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

The new r_i will be %.