E(rP) = rf + βP × [E(rM) – rf]
Problem 9-1
What must be the beta of a portfolio with E(rP) = 18%, if rf= 6% and E (rM) = 14%? (Do not round intermediate calculations. Round your
answer to 1 decimal place.)
E(rP) = 0.145
E(rM) = 0.1
market price of a security 90
Problem 9-2
E(ri) = rf + βi × [E(rM) – rf]
rf = 0.04
E(rM) – rf = 0.06
βDiscount store 1.5
βEverything $% 1
Problem 9-4
Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
Company $1 Discount Store Everything $5
Forecasted return 12% 11%
Standard deviation of returns 8% 10%
Beta 1.5 1.0
CAPM calculations: CAPM Forecasted Return
$1 Discount Store 0.13 0.12
Problem 9-5
Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
Company $1 Discount Store Everything $5
Everything $5 0.1 0.11
Answer:
Problem 9-6
What is the expected rate of return for a stock that has a beta of 1.0 if the expected return on the
market is 15%?
Answer:
Problem 9-7
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following
statements is most accurate?
E(rM) 0.13
rf = 0.05
E(rM) – rf = 0.08
βProject 1.3
18
18
18
Answers: 18
18
18
18
Problem 9-8
You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash
flows (in millions of dollars):
Years from Now After-Tax Cash Flow
0 –40
1–10 15
Mkt Return
Aggressive Stk
Defensive Stk T-bill
0.05 -0.02 0.06 0.06
0.25 0.38 0.12
a.
E(rA) = 0.18
E(rD) = 0.09
E(rM) = 0.15
Problem 9-9
Consider the following table, which gives a security analyst’s expected return on two stocks for two particular market
returns:
Market Return Aggressive Stock Defensive Stock
5% –2% 6%
25 38 12
a. What are the betas of the two stocks? (Do not round intermediate calculations. Round your answers to 2 decimal
places.)
b. What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25%? (Do not
round intermediate calculations. Omit the “%” sign in your response.)
e. What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics
of the defensive firm’s stock if market return is equally likely to be 5% or 25%? Also, assume a T-Bill rate of 6%. (Do not
round intermediate calculations. Round your answer to 1 decimal place. Omit the “%” sign in your response.)
Answer:
Problem 9-10
If the simple CAPM is valid, say whether the situation is possible or not?
Portfolio Expected Return Beta
Not possible
Problem 9-11
If the simple CAPM is valid, say whether the situation is possible or not?
Portfolio Expected Return Standard Deviation
A30 35
B40 25