A security had the following returns over the last four years. Compute the geometric mean return.

Return (%)

-1

19

4

-7

3.22%

3.42%

3.12%

3.32%

3.52%

You have been scouring The Wall Street Journal looking for stocks that are good values

and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 6

percent and the market risk premium (rM - rRF) is 2.7 percent. Which security would be the best

investment? (Assume you must choose just one.)

c. Expected Return = 5.04%, Beta = -0.4, Required Return = 4.92%, Expected Less Required Return = 0.12%

a. Expected Return = 9.01%, Beta = 2, Required Return = 11.4%, Expected Less Required Return = -2.39%

d. Expected Return = 8.74%, Beta = 0.4, Required Return = 7.08%, Expected Less Required Return = 1.66%

e. Expected Return = 11.50%, Beta = 1.5, Required Return = 10.05%, Expected Less Required Return = 1.45%

b. Expected Return = 7.06%, Beta = 0.4, Required Return = 7.08%, Expected Less Required Return = -0.02%

Given the following probability distribution, what are the expected return and the standard

deviation of returns for Security J?

State Pi rj

1 0.5 9%

2 0.4 8%

3 0.1 27%

10.40%; 5.55%

10.40%; 5.25%

10.20%; 5.35%

10.60%; 5.55%

10.60%; 5.75%