PROBLEM 1: Week 1 and Week 2 Risk & Return Exercises

A few years ago, the Value Line Investment Survey reported the following market betas for the stocks of

selected healthcare providers:

Company

Beta

Tenet Healthcare

0.80

Beverly Enterprises

1.10

HCA Healthcare

1.35

United Health Group

1.60

At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and the required

rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively.

a. What are the required rates of return on the four stocks?

b. Why do their required rates of return differ?

c. Suppose that a person is planning to invest in only one stock rather than hold a well-diversified stock

portfolio. Are the required rates of return calculated above applicable to the investment? Explain your

answer.

PROBLEM 2: Week 1 and Week 2 Risk & Return Exercises

Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served

by the company. The company's analysts estimate a market beta for the hospital project of 1.2, which is

somewhat higher than the 0.8 market beta of the company's average project. Financial forecasts for the

new hospital indicate an expected rate of return on the investment of 20 percent. If the

risk-free rate, RF, is 7 percent and the required rate of return on the market,R(Rm), is 12 percent, is the

new hospital in the best interest of HCA's shareholders? Explain your answer.