10-15 Expected Return and Risk Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potential returns: (LG10-1) Economic State Fast growth Slow growth Recession Depression 10-16 Probability 0.30 0.50 0.15 0.05 Return 60% 13 -15 -45 Risk Premiums You own $10,000 of Dennys Corp. stock that has a beta of 2.9. You also own $15,000 of Qwest Communications (beta 1.5) and $5,000 of Southwest Airlines (beta - 0.7). Assume that the market return will be 11.5 percent and the risk-free rate is 4.5 percent. What is the market risk premium? What is the risk premium of each stock? What is the risk premium of the portfolio? (LG10-3) 10-17 Portfolio Beta and Required Return You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio? ( LG 10-3) Price Shares Beta Amazon.com $40.80 100 3.8 Family Dollar Stores 30.10 150 1.2 McKesson Corp. 57.40 75 0.4 Schering-Plough Corp. 23.80 200 0.5 10-18 Required Return Using the information in the table, compute the required return for each company using both CAPM and the constant-growth model. Compare and discuss the results. Assume that the market portfolio will earn 12 percent and the risk-free rate is 3.5 percent. (LG10-3, LG 10-7) Price Upcoming Dividend US Bancorp $36.55 $1.60 Praxair 64.75 1.12 Eastman Kodak 24.95 1.00 Growth Beta 10.0% 1.8 11.0 2.4 4.5 0.5