PA 4 Business Fin

Problem Assignment 4

1. You’ve observed the following returns on INTC Corporation’s stock over the past five years: -25%, -36%, 9%, 11%, and 17%.
a. What was the arithmetic average return on the stock over this five-year period?
b. What was the variance of returns over this period?
c. What was the standard deviation of returns over this period?
d. Suppose the current T-bill rate is 0.15%. What is the risk premium of owing INTC Corporation’s stock?
e. What range of returns would you expect to see 95% of the time?

2. Suppose you have $20,000 total. If you put $14,000 in Stock A and the remainder in Stock B, what will be the expected return on your portfolio? What will be the standard deviation on your portfolio?

State of Economy
Probability
Return on A
Return on B
Recession
0.1
-20%
30%
Normal
0.6
10%
20%
Boom
0.3
70%
50%

3. Stock Y has a beta of 1.50 and an expected return of 16%. Stock Z has a beta of 0.70 and an expected return of 11.5%. The market risk premium is 8%. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

4. A stock has a beta of 0.9, the expected return on the market is 10%, and the risk-free rate is 1%. What must the expected return on this stock be?

5. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16% and Stock Y with an expected return of 11%. If your goal is to create a portfolio with an expected return of 14.25%, how much money will you invest in stock X? In Stock