Problem 8-1 Expected return

A stock's returns have the following distribution:

Demand for the Company's Products	Probability of This Demand Occurring	Rate of Return If This Demand Occurs
Weak	0.1	-28%
Below average	0.1	-15
Average	0.3	15
Above average	0.3	36
Strong	0.2	60
	1.0

Calculate the stock's expected return. Round your answer to two decimal places. %

Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. %

Calculate the stock's coefficient of variation. Round your answer to two decimal places.

Problem 8-12 Required rate of return

Suppose r_RF = 4%, r_M = 10%, and b_i = 2.

1. What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. %

2. Now suppose r_RF increases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i?

Both r_M and r_i will remain the same.

Both r_M and r_i will increase by 1%.

r_M will remain the same and r_i will increase by 1%.

r_M will increase by 1% and r_i will remain the same.

Both r_M and r_i will decrease by 1%.

3. Now suppose r_RF decreases to 3%. The slope of the SML remains constant. How would this affect r_M and r_i?

Both r_M and r_i will decrease by 1%.

r_M will decrease by 1% and r_i will remain the same.

r_M will remain the same and r_i will decrease by 1%.

Both r_M and r_i will increase by 1%.

Both r_M and r_i will remain the same.

4. Now assume that r_RF remains at 4% but r_M increases to 11%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.The new r_i will be _________ %

5. Now assume that r_RF remains at 4% but r_M falls to 9%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

The new r_i will be _______ %

Problem 8-7 Portfolio required return

Suppose you are the money manager of a $4.45 million investment fund. The fund consists of four stocks with the following investments and betas:

Stock	Investment	Beta
A	$ 320,000	1.50
B	340,000	- 0.50
C	1,140,000	1.25
D	2,650,000	0.75

If the market's required rate of return is 11% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. %