1) Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium:r^L = 9.25%; rRF = 6.6%; rM = 10%. Round your answer to two decimal places. ______

2) Assume that the risk-free rate is 3% and the market risk premium is 8%.

A) What is the required return for the overall stock market? Round your answer to two decimal places. %______

B) What is the required rate of return on a stock with a beta of 1.3? Round your answer to two decimal places. %________

3) A stock has a required return of 16%; the risk-free rate is 6.5%; and the market risk premium is 3%.

A) What is the stock's beta? Round your answer to two decimal places._______ B) If the market risk premium increased to 9%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.

I) If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

II) If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.

III) If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

IV) If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.

V) If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

C) New stock's required rate of return will be__________%. Round your answer to two decimal places.

4) Stocks A and B have the following probability distributions of expected future returns:

Probability	A	B
0.1	-13%	-36%
0.2	2	0
0.4	10	22
0.2	24	28
0.1	40	43

A) Calculate the expected rate of return, rB, for Stock B (rA = 11.90%.) Do not round intermediate calculations. Round your answer to two decimal places. %______

B) Calculate the standard deviation of expected returns, A, for Stock A (B = 20.90%.) Do not round intermediate calculations. Round your answer to two decimal places. %________

C) Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

D) Is it possible that most investors might regard Stock B as being less risky than Stock A?

I) If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.

II) If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.

III) If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.

IV) If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.

V) If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.

5) You have been managing a $5 million portfolio that has a beta of 1.90 and a required rate of return of 13%. The current risk-free rate is 7.00%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.90, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.

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