Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.

Finance 301 -- 1/1

Finance 301-- June 27, 2002 Menahem RosenbergIntroduction of Financial Management

Exercise 51. Stock A and B have the following probability distributions of expected future returns:

Probability A B0.1 -10% -35%0.2 2 00.4 12 200.2 20 250.1 38 45

a. Calculate the expected rate of return for stock A and B.b. Calculate the standard deviation of the expected returns for stock A ( for stock B it is 20.35%)c. Calculate the coefficient of variation. Is stock B less risky ? Explain.d. Assume a portfolio made of 50% A and 50% B - Calculate its expected return and its standarddeviation.

2. Suppose rRF = 5%, rM = 14%, and bi = 1.3a. What is the required rate of return on stock i ?b. Now suppose the inflation causes rRF to increase to 10%. The slope of the SML remains theconstant. How would this affect rM and ri ?c. Now suppose that rM increases to 16%. The slope of SML does not remain constant. Howwould this change affect ri ?

3. Suppose you are a money manager of a $4 million investment fund. The fund consist with the 4stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 .50

C 1,000,000 1.25

D 2,000,000 .75

a. If the market required rate of return is 14% and the risk free rate is 6%, what is the fund’srequired rate of return ?b. Stock A is considered too risky. You decide to sell it at its posted value, and hold the proceedin form of cash. What is the beta of cash ?c. Find the new fund’s required rate of return ?

4. Suppose your portfolio consists $10,000 all invested in one stock A that has a beta of 1.50.a. You can invest any amount in stock B that has a beta 0.75. What proportion of your portfolio doyou need to switch into stock B, so that the new portfolio beta will be 1.25.b. Repeat (a) with a risk free asset such as a T-bill.