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53. Risk Premiums You own $5,000 of Software Corp's stock that has a beta of 3.75. You
also own $10,000 of Home Improvement Corp. (beta = 1.5) and $15,000 of Publishing Corp. (beta
= 0.35). Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent.
What is the risk premium of the portfolio?
54. Portfolio Beta and Required Return You hold the positions in the following table. What
is the beta of your portfolio? If you expect the market to earn 14 percent and the risk-free rate is
5 percent, what is the required return of the portfolio?
55. Portfolio Beta You hold the positions in the following table. What is the beta of your
portfolio?
56. Compute the expected return given these three economic states, their likelihoods, and
the potential returns:
57. The average annual return on the S&P 500 Index from 1986 to 1995 was 17.6 percent.
The average annual T-bill yield during the same period was 9.8 percent. What was the market
risk premium during these 10 years?
58. Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10
percent and the risk-free rate is 4 percent, what is Hastings' required return?
59. Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and
the risk-free rate is 7 percent, what is Netflicks' risk premium?
60. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85
percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?
61. The Nasdaq stock market bubble peaked at 10,816 in 2000. Two and a half years later it
had fallen to 4,000. What was the percentage decline?
62. Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year.
Since analysts estimate Paccar will have a 14.2 percent growth rate, what is its required return?
63. Universal Forest's current stock price is $154.00 and it is likely to pay a $5.23 dividend
next year. Since analysts estimate Universal Forest will have a 13.0 percent growth rate, what is
its required return?
64. A manager believes his firm will earn an 18 percent return next year. His firm has a beta
of 1.75, the expected return on the market is 13 percent, and the risk-free rate is 5 percent.
Compute the return the firm should earn given its level of risk and determine whether the
manager is saying the firm is under-valued or over-valued.
65. You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of
Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of
your portfolio?
66. Compute the expected return and standard deviation given these four economic states,
their likelihoods, and the potential returns:
67. You own $10,000 of Denny's Corp. stock that has a beta of 3.2. You also own $15,000 of
Qwest Communications (beta = 1.9) and $15,000 of Southwest Airlines (beta = 0.4). Assume that
the market return will be 13 percent and the risk-free rate is 5.5 percent. What is the risk
premium of the portfolio?
68. You hold the positions in the following table. What is the beta of your portfolio? If you
expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required
return of the portfolio?
69. You hold the positions in the following table. What is the beta of your portfolio? If you
expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the required
return of the portfolio?
70. Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The
firm has a beta of 0.8 and is expected to grow at 10 percent for the foreseeable future. Compute
Praxair's required return using both CAPM and the constant growth model. Assume that the
market portfolio will earn 10 percent and the risk-free rate is 3 percent.
71. Estee Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45.
The firm has a beta of 1.1 and is expected to grow at 10 percent for the foreseeable future.
Compute Estee Lauder's required return using both CAPM and the constant growth model.
Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.
72. ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent
rate for the next seven years. What is ABC's required return?
73. U.S. Bancorp holds a press conference to announce a positive news event that was
unexpected to the market. As soon as the announcement is made, the stock price increases $8
per share but then over the next hour the price continues to increase resulting in a total increase
of $11. Given this information which of the following statements is correct?
