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PROBLEMS 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 (50%) (5) Weak Below average Average Above average Strong 16 0.2 0.1 1.0 8-2 Calculate the stock's expected return, standard deviation, and coefficient of variation. Portfolio beta An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two invest- ments in her portfolio, what is her portfolio's beta? Required rate of return Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent. What is the required rate of return on a stock with a beta of 0.7? Expected and required rates of return Assume that the risk-free rate is 5 percent and the market risk premium is 6 percent. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2? Beta and required rate of return A stock has a required return of 11 percent; the risk- free rate is 7 percent; and the market risk premium is 4 percent. What is the stock's beta? b. If the market risk premium increased to 6 percent, what would happen to the stock's required rate of return? Assume the risk-free rate and the beta remain unchanged. 8-5