1. Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $46. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.4%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2017 (figures in percent per year) are as follows. Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%) Treasury bills 3.8 Treasury bonds 5.3 1.5 Common stocks 11.5 7.7 a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.) b. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 2. Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2013 33.30 0.12 2014 13.20 0.12 2015 −3.50 0.12 2016 14.50 0.07 2017 23.80 0.09 Required: a. What was the risk premium on common stock in each year? Year Risk Premium 2013 % 2014 % 2015 % 2016 % 2017 % · b. What was the average risk premium? Average risk premium % c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Standard deviation % 3. A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $2 per share and sells for $59. Required: a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $44. What are the dividend yield and percentage capital gain in this case? 4. You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. a. What is the rate of return on your investment if the end-of-year stock price is (i) $38; (ii) $40; (iii) $46? (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers as a whole percent.) Stock Price Rate of Return 38 % 40 % 46 % b. What is your real (inflation-adjusted) rate of return if the inflation rate is 3%? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Negative amounts should be indicated by a minus sign.) Stock Price Real Rate of Return 38 % 40 % 46 % 5. Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −8 % 21 % Normal economy 0.50 22 % 9 % Boom 0.20 32 % 9 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? multiple choice · No · Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 deci ...

1. 1. Top hedge fund manager Sally Buffit believes that a stock
with the same market risk as the S&P 500 will sell at year-end
at a price of $46. The stock will pay a dividend at year -end of
$3.00. Assume that risk-free Treasury securities currently offer
an interest rate of 2.4%.
Average rates of return on Treasury bills, government bonds,
and common stocks, 1900–2017 (figures in percent per year) are
as follows.
Portfolio
Average Annual
Rate of Return (%)
Average Premium (Extra return
versus Treasury bills) (%)
Treasury bills
3.8
Treasury bonds
5.3
1.5
Common stocks
11.5

2. 7.7
a. What is the discount rate on the stock? (Enter your answer as
a percent rounded to 2 decimal places.)
b. What price should she be willing to pay for the stock
today? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
2. Assume these are the stock market and Treasury bill returns
for a 5-year period:
Year
Stock Market Return (%)
T-Bill Return (%)
2013
33.30
0.12
2014
13.20
0.12

3. 2015
−3.50
0.12
2016
14.50
0.07
2017
23.80
0.09
Required:
a. What was the risk premium on common stock in each year?
Year
Risk Premium
2013
%
2014

4. %
2015
%
2016
%
2017
%
·
b. What was the average risk premium?
Average risk premium
%
c. What was the standard deviation of the risk premium? (Ignore
that the estimation is from a sample of data.)
Standard deviation
%
3. A stock is selling today for $50 per share. At the end of the
year, it pays a dividend of $2 per share and sells for $59.

5. Required:
a. What is the total rate of return on the stock?
b. What are the dividend yield and percentage capital gain?
c. Now suppose the year-end stock price after the dividend is
paid is $44. What are the dividend yield and percentage capital
gain in this case?
4.
You purchase 100 shares of stock for $40 a share. The stock
pays a $2 per share dividend at year-end.
a. What is the rate of return on your investment if the end-of-
year stock price is (i) $38; (ii) $40; (iii) $46? (Leave no cells
blank - be certain to enter "0" wherever required. Enter your
answers as a whole percent.)
Stock Price
Rate of Return
38
%

6. 40
%
46
%
b. What is your real (inflation-adjusted) rate of return if the
inflation rate is 3%? (Do not round intermediate calculations.
Enter your answers as a percent rounded to 2 decimal places.
Negative amounts should be indicated by a minus sign.)
Stock Price
Real Rate of Return
38
%
40
%
46
%
5. Consider the following scenario analysis:
Rate of Return
Scenario

7. Probability
Stocks
Bonds
Recession
0.30
−8
%
21
%
Normal economy
0.50
22
%
9
%
Boom
0.20
32
%
9
%
a. Is it reasonable to assume that Treasury bonds will provide
higher returns in recessions than in booms?
multiple choice
· No
· Yes
b. Calculate the expected rate of return and standard deviation
for each investment. (Do not round intermediate calculations.
Enter your answers as a percent rounded to 1 decimal place.)

8. Expected Rate of Return
Standard Deviation
Stocks
%
%
Bonds
%
%
c. Which investment would you prefer?
Stock
Bond
Which investment would you prefer?
More risk averse?
Less risk-averse?
Risk-neutral?
More risk averse?
Less risk-averse?
Risk-neutral?
(Select one for each by highlighting)
6. In a recent 5-year period, mutual fund manager Diana Sauros
produced the following percentage rates of return for the
Mesozoic Fund. Rates of return on the market index are given
for comparison.

9. 1
2
3
4
5
Fund
−1.2
+23.4
+41.3
+10.3
+0.3
Market index
−0.8
+15.0
+30.8
+11.6
−0.6
a. Calculate (a) the average return on both the Fund and the
index, and (b) the standard deviation of the returns on each. (Do
not round intermediate calculations. Round your answers to 2
decimal places.)
b. Did Ms. Sauros do better or worse than the market index on
these measures?
Mesozoic Fund Return
Market Portfolio Return
a.
Average return

10. Standard deviation
b.
Did Ms. Sauros do better or worse than the market index on
these measures?
7. Consider the following scenario analysis:
Rate of Return
Scenario
Probability
Stocks
Bonds
Recession
0.2
-7
%
15
%
Normal economy
0.7
16
7
Boom

11. 0.1
25
6
Assume a portfolio with weights of 0.60 in stocks and 0.40 in
bonds.
a. What is the rate of return on the portfolio in each
scenario? (Enter your answer as a percent rounded to 1 decimal
place.)
Rate of Return
Recession
%
Normal economy
%
Boom
%
b. What are the expected rate of return and standard deviation
of the portfolio? (Do not round intermediate calculations. Enter
your answer as a percent rounded to 2 decimal places.)

12. Expected return
%
Standard deviation
%
8. Here are the returns on two stocks.
Digital Cheese
Executive Fruit
January
+18
+7
February
−2
+1
March

13. +4
+4
April
+6
+16
May
−3
+2
June
+3
+5
July
−1

14. −2
August
−7
−1
Required:
a-1. Calculate the variance and standard deviation of each stock.
a-2. Which stock is riskier if held on its own?
b. Now calculate the returns in each month of a portfolio that
invests an equal amount each month in the two stocks.
c. Is the variance more or less than halfway between the
variance of the two individual stocks?
9. A stock with a beta of 0.9 has an expected rate of return of
10%. If the market return this year turns out to be 8 percentage
points below expectations, what is your best guess as to the rate
of return on the stock? (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal place.)
10. The risk-free rate is 7% and the expected rate of return on
the market portfolio is 14%.
a. Calculate the required rate of return on a security with a beta
of 2.45. (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)
b. If the security is expected to return 16%, is it overpriced or
underpriced?

15. 11. Consider the following two scenarios for the economy and
the expected returns in each scenario for the market portfolio,
an aggressive stock A, and a defensive stock D.
Rate of Return
Scenario
Market
Aggressive
Stock A
Defensive
Stock D
Bust
–8
%
–13
%
–6
%
Boom
26

16. 35
19
Required:a. Find the beta of each stock.
b. If each scenario is equally likely, find the expected rate of
return on the market portfolio and on each stock.
c. If the T-bill rate is 5%, what does the CAPM say about the
fair expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your
answers to (a) through (c)?
12. A share of stock with a beta of 0.77 now sells for $52.
Investors expect the stock to pay a year-end dividend of $4. The
T-bill rate is 4%, and the market risk premium is 7%. If the
stock is perceived to be fairly priced today, what must be
investors’ expectation of the price of the stock at the end of the
year? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
13. Suppose that the S&P 500, with a beta of 1.0, has an
expected return of 13% and T-bills provide a risk-free return of
6%.
a. What would be the expected return and beta of portfolios
constructed from these two assets with weights in the S&P 500
of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0? (Leave no cells

17. blank - be certain to enter "0" wherever required. Do not round
intermediate calculations. Enter the value of Expected return as
a percentage rounded to 2 decimal places and value of Beta
rounded to 2 decimal places.)
Expected Return
Beta
(i)
0
%
(ii)
0.25
%
(iii)
0.50
%
(iv)
0.75
%
(v)
1.0
%

18. b. How does expected return vary with beta? (Do not round
intermediate calculations.)
The expected return
by
% for a one unit increase in beta.
14. The Treasury bill rate is 6%, and the expected return on the
market portfolio is 14%. According to the capital asset pricing
model:
a. What is the risk premium on the market?
b. What is the required return on an investment with a beta of
1.4? (Do not round intermediate calculations. Enter your answer
as a percent rounded to 1 decimal place.)c. If an investment
with a beta of 0.6 offers an expected return of 8.4%, does it
have a positive or negative NPV?
d. If the market expects a return of 11.6% from stock X, what is
its beta? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
15. A project under consideration has an internal rate of return
of 15% and a beta of 0.9. The risk-free rate is 5%, and the
expected rate of return on the market portfolio is 15%.
a. What is the required rate of return on the project? (Do not
round intermediate calculations. Enter your answer as a whol e
percent.)
b. Should the project be accepted?

19. c. What is the required rate of return on the project if its beta is
1.90? (Do not round intermediate calculations. Enter your
answer as a whole percent.)
d. If project's beta is 1.90, should the project be accepted?
16. The Treasury bill rate is 4% and the market risk premium is
8%.
Project
Beta
Internal Rate of Return, %
P
0.65
10
Q
0.00
10
R
1.00
12
S
0.05
11

20. T
0.60
14
a. What are the project costs of capital for new ventures with
betas of 0.40 and 1.78? (Do not round intermediate calculations.
Enter your answers as a percent rounded to 2 decimal places.)
b. Which of the capital investments shown above have positive
(non-zero) NPV's? (You may select more than one answer.
Single click the box with the question mark to produce a check
mark for a correct answer and double click the box with the
question mark to empty the box for a wrong answer.)
· Project P
· Project Q
· Project S
· Project T
· Project R
17. You are considering the purchase of real estate that will
provide perpetual income that should average $65,000 per year.
How much will you pay for the property if you believe its
market risk is the same as the market portfolio’s? The T-bill
rate is 5%, and the expected market return is 8.0%.