Chapter 10/11 Homework Review

Question 1

You bought stock three months ago for $75.82 per share. The stock paid no dividends. The current share price is $79.09. What is the APR and EAR of your investment?

Answer 1

APR= 17.24%
EAR= 18.39%

Question 2

Over a particular period, an asset had an average return of 5.5 percent and a standard deviation of 9.0 percent.

What range of returns would you expect to see 95 percent of the time for this asset?

What about 99 percent of the time?

Answer 2

95 percent of the time the Expected range of returns would be -12.5% to 24.5%. 99 percent of the time, the Expected range of returns would be -21.5% to 32.5%.

Question 3

A stock has had returns of -19.4 percent, 29.4 percent, 28.8 percent, -10.5 percent, 35.2 percent, and 27.4 percent over the last six years. what are the arithmetic and geometric returns for the stock?

Answer 3

Arithmetic average return= 15.15%.
Geometric average return= 12.9%

Question 4

You own a portfolio that has $2,300 invested in Stock A and $3,400 invested in Stock B. Assume the expected returns on these stock are 9 percent and 15 percent respectively. What is the expected return on the portfolio?

Answer 4

Expected return is 12.58%.

Question 5

You have $16,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 10 percent. Assume your goal is to create a portfolio with an expected return of 13.5 percent. How much money will you invest in Stock X and Stock Y?

Answer 5

Investment in Stock X= $9,333.33

Investment in Stock Y= $6,666.67

Question 6

A stock has a beta of 1.13, the expected return on the market is 10.7 percent, and the risk-free rate is 4.6 percent. What must the expected return on this stock be?

Answer 6

Expected return= 11.49%

Question 7

A stock has an expected return of 10.2 percent, its beta is 1.03, and the risk-free rate is 6.4%. What must the expected return on the market be?

Answer 7

Market expected return= 10.09%

Question 8

Stock Y has a beta of 1.40 and an expected return of 16.2 percent. Stock Z has a beta of .85 and an expected return of 12.2 percent. If the risk-free rate is 5.35 percent and the market risk premium is 7.85 percent, are these stocks overvalued or undervalued?

Answer 8

Stock Y is overvalued and Stock Z is undervalued.