Problem set 1

One year ago, you bought a stock for $36.48 a share. You
recently received a dividend of $1.62 per share and sold the stock today for
$40.18 a share. What is the dollar return and percentage return on this
investment?

One year ago, you bought 480 shares of ABC Company for
$28.32 a share. You recently received a dividend of $0.75 per share and sold
the stock today for $35 a share. What is the dollar return and percentage
return on this investment?

Problem set 2

Over the past five years, a stock provided annual returns of
12.6 percent, 5.8 percent, 7.9 percent, -11.2 percent and -2.4 percent. What is
the arithmetic average return? What is the variance of these returns? What is
the standard deviation of these returns?

A company had returns of 5%, 10%, -15%, 20%, -12%, 22%, 8%
in the last few years. Compute the arithmetic average return and standard
deviation of returns.

Refer to Problem 2. If inflation rate is 2.5% and the
risk-free rate is 3%, solve for the real rate and the risk premium. Note: Use
arithmetic average return as nominal rate

Problem set 3

Suppose the nominal rate is 15%, the real rate is 10.5%,
what is the inflation rate?

If the investors require a 10% real rate of return and the
inflation rate is 8%, what is the nominal rate?

The nominal rate is 15.5% and the inflation rate is 5%, what
is the real rate?

Problem set 4

Assume that your portfolio comprises of Stocks A, B, and C.
Based on the following information, calculate the portfolio expected return and
portfolio beta:

Security Value Return Beta

Stock A $10,000 10% 1.1

Stock B $20,000 5% 0.2

Stock C $30,000 15% 2.1

Problem set 5

A stock has a beta of 0.90, the expected return on the
market is 13%, and the risk-free rate is 6%. What must the expected return on
this stock be?

A stock has an expected return of 17%, the risk-free rate is
5.5%, and the market risk premium is 8%. What must the beta of this stock be?

You own a portfolio that has $1,200 invested in Stock A and
$1,900 invested in Stock B. If the expected returns on these stocks are 11% and
16%, respectively, what is the expected return on the portfolio?

Problem set 6

There are 3 stocks in a portfolio: Stock A, Stock B, and
Stock C. The portfolio has a return of 3.3%. You are given below the weight of
each stock in the portfolio and rate of return. What is the return of Stock C?

Stock
Weight Rate of Return

A 35% -4%

B 60% 7%

C 5% ?

Problem set 7

You are given the information for the following securities

Security
Weight Beta

DCLK
.133 4.03

KO
.2 0.84

INTC
.267 1.05

KEI .4 0.59

What is the portfolio beta?

Which security has the highest systematic risk?

Which security has the lowest systematic risk?

Is the systematic risk of the portfolio more or less than
the market?

Problem set 8

Assume Risk–free rate = 3%, Expected return on the market =
8%. Calculate the expected return on the stock if the beta is

0

0.5

1

2

Interpret your answers

Problem set 9

A $100,000 portfolio is invested in a risk-free security and
two stocks. The beta of stock A is 1.80 while the beta of stock B is 0.20.
One-half of the portfolio is invested in the risk-free security. How much is
invested in stock A if the beta of the portfolio is 0.75?

Problem set 10

Suppose you hold a diversified portfolio consisting of
$7,500 investment in each of 20 different common stocks. The portfolio’s beta
is 1.12. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500
and use the proceeds to buy another stock whose beta is 1.75. Calculate your portfolio’s
new beta.

You have a $2 million portfolio consisting of a $100,000
investment in each of 20 different stocks. The portfolio has a beta of 1.1. You
are considering selling $100,000 worth of one stock with a beta od 0.90 and
using the proceeds to purchase another stock with a beta of 1.40. What will the
portfolio’s new beta be after these transactions?

Problem set 11

You want to create a portfolio equally as risky as the
market. Given this information, fill in the rest of the following table:

Asset Investment
Beta

Stock A 20% 0.8

Stock B 25% 1.3

Stock C ? 1.5

Risk-free Asset ? ?

Hint: Some questions to answer before you start solving the
above table:

What is the beta of the market portfolio? risk-free asset?

What should the weights of individual securities in a
portfolio sum to?

Problem set 12

The Treasury Bill rate is 4%, and the expected return on the
market portfolio is 12%.

What is the risk
premium on the market?

What is the required return on an investment with beta of
1.5?

If the market expects a return of 11.2% from Stock X, what
is its beta?

Problem set 13

A stock has a beta of 1.2 and an expected return of 16%. A
risk-free asset currently earns 5%.

What is the beta of the risk-free asset?

What is the expected return on the portfolio that is equally
invested in the two assets (i.e. stock and risk-free asset)?

If a portfolio of the two assets has a beta of 0.75, what
are the portfolio weights?

If a portfolio of the two assets has an expected return of
8%, what is its beta?

If the security prices reflect only past prices and trading
volume information, then the market is (choose one from below):

weak-form efficient

semi-strong form efficient

strong-form efficient

What is the difference between intrinsic value and market
value of the asset?

The instrinsic value of an undervalued asset is likely
_________ than the asset’s market value.