Please show the formulas you are using and show your calculations. Problem 1: You purchased shares of Argo, one year ago for $30 per share. Today you received a dividend of $1 per share and incurred a capital gain. If your total return over the past year on Argo shares was 10%, what is the share price of Argo today? Problem 2: You purchase shares in Onix Inc. for the current market price of $100. You are anticipating a normal market (40% probability). If this is the case, you believe your shares will be worth $110 a year from today. There is a 30% chance there could be a bull market and a 30% chance it could be a bear market; in which case your shares will be $140 and $80 next year respectively. Onix does not pay out any dividends. What is your expected rate of return? Problem 3: Consider the following investments: Investment Expected return Standard deviation A 5% 10% B 7% 11% C 6% 12% D 6% 10% Which investment would you prefer between the following pairs: explain? a) C and D b) A and D c) B and C Problem 4: A security analyst has forecasted returns on the market portfolio and shares of RIM under three different economic conditions for next year: Return on Return on State of the economy Probability Market RIM Boom 35% 55% Moderate Growth 11% 13% Recession -6% -14% (a) Calculate the expected returns on the market portfolio. (2pts)(b) Calculate the beta for RIM, assume the expected return for RIM is 16.75%. (6pts) (c) Assuming the risk-free rate is 6%: (i) Calculate the market risk premium (ii) According to the CAPM, what is the required return for RIM? Compare this to the expected return of RIM (expected return is 16.75%). What is the implication of your finding? Problem 5: You own a portfolio equally invested in a risk-free asset and two risky assets (stocks). If one of the stocks has a beta of 0.8 and the total portfolio is equally risky as the market, what must the beta be for the other stock in the portfolio? Problem 6: (8 marks) You are given the following information on stock of two companies: Company A and Company B. Asset Standard deviation of returns Beta Correlation with market Stock price based on CAPM Company A 25% 0.1 ?? Company B 25% 1.0 0.6 $15.79 Market portfolio 15% Both companies, are expected to pay a dividend of $1.50 next year, and dividends are expected to stay at that level forever. Assume the risk-free rate is 4% and the market risk premium is 5.5%. a) According to CAPM what should be the price of Company A shares? b) Is there a difference between the stock price for company A and B? If so, why? Problem 7: A company's common shares have a beta of 1.50. Currently, the risk-free rate of return is 7%, and the return on the market portfolio of assets is 10%. The return on the common shares based on current prices is 11%. a) Use CAPM to find the required return on the common shares. b) Based on your calculation in a), would you recommend these common shares be purchased as an investment? Why or why not? c) If the return on the market portfolio were to increase by 1% to 11%, what would we expect to happen to the common shares required return? d) Assume that because of investors becoming less risk-averse, the market return drops by 1% to 9%. What impact would this change have on your responses in part b)?