FIN220 Practice Questions (Module 3)

1. A stocks expected return has the following distribution:

DEMAND FOR THE COMPANYS PRODUCTS	PROBABILITY OF THIS DEMAND OCCURRING	RATE OF RETURN IF THIS DEMAND OCCURS (%)
Weak	0.1	(50)
Below Average	0.2	(5)
Average	0.4	16
Above Average	0.2	25
Strong	0.1	60

Calculate the stocks expected return and standard deviation.

2. Selena Maranjian invests the following sum of money in common stock having expected returns as follows:

Common Stock	Amount Invested in $	Expected Return
WOOPS	6,000	0.14
KABOOM	11,000	0.16
KAPOWW	9,000	0.17
UPDWN	7,000	0.13
RINGG	5,000	0.20

3. Stocks X and Y have the following probability distributions of expected future returns:

Probability	X	Y
0.1	-10%	-35%
0.2	2%	0%
0.4	12%	20%
0.2	20%	25%
0.1	38%	45%

1. Calculate the expected rate of return, , for Stock Y. Return for Stock X, (_X =12%).
2. Calculate the standard deviation of expected returns for Stock X. (That for Stock Y is 20.35 percent.)

4. Suppose R_F = 5%, R_M = 10%, and R_A = 12%.
   1. Calculate Stock As beta.
   2. If Stock As beta were 2.0, what would be As new required rate of return?