1.

Youve observed the following returns on Crash-n-Burn Computers stock over the past five years: 11
percent, 11 percent, 18 percent, 23 percent, and 10 percent. Suppose the average inflation rate over
this period was 2.0 percent and the average T-bill rate over the period was 3.1 percent.

a.
What was the average real return on Crash-n-Burns stock? (Round your answer to 2 decimal places.
(e.g., 32.16))

Average real return %

Answer: 7.10

b.
What was the average nominal risk premium on Crash-n-Burns stock? (Round your answer to 1 decimal
place. (e.g., 32.1))

Average nominal risk %

Answer: 8.0

2.Suppose you bought a 7 percent coupon bond one year ago for $860. The bond sells for $890 today.

a.
Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

Total dollar return $

Answer: 100

b.
What was your total nominal rate of return on this investment over the past year? (Round your answer
to 2 decimal places. (e.g., 32.16))

Nominal rate of return %

Answer: 11.63

c.
If the inflation rate last year was 1.5 percent, what was your total real rate of return on this investment?
(Round your answer to 2 decimal places. (e.g., 32.16))
Real rate of return %
Answer: 9.98

3.
Returns
Year X Y
1 13 % 23 %
2 16 28
3 12 15
4 11 12
5 10 18

Using the returns shown above, calculate the arithmetic average returns, the variances, and the
standard deviations for X and Y. (Round your percent answers to 2 decimal places. (e.g., 32.16) and
variances to 5 decimal places. (e.g., 32.16161))

XY
Average returns % %
Variances
Standard deviations % %

Answer:

X Y
Average returns 8.00% 14.40%
Variances 0.94% 1.94%
Standard deviations 9.70% 13.92%

4.Suppose a stock had an initial price of $60 per share, paid a dividend of $0.60 per share during the
year, and had an ending share price of $72.

What was the dividend yield and the capital gains yield? (Round your answers to 2 decimal places. (e.g.,
32.16))

Dividend yield %
Capital gains yield %

Answer:

Dividend yield % 1.00%

Capital gains yield % 20.00%
5.
Youve observed the following returns on Crash-n-Burn Computers stock over the past five years: 16
percent, 16 percent, 18 percent, 28 percent, and 10 percent.

a.
What was the arithmetic average return on Crash-n-Burns stock over this five-year period? (Round your
answer to 1 decimal place. (e.g., 32.1))

Average return %

Answer: 11.2

b-1
What was the variance of Crash-n-Burns returns over this period? (Round your answer to 5 decimal
places. (e.g., 32.16161))

Variance

Answer: 0.02186

b-2
What was the standard deviation of Crash-n-Burns returns over this period? (Do not round
intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Standard deviation %
Answer: 14.78

6. Suppose a stock had an initial price of $62 per share, paid a dividend of $2.50 per share during the
year, and had an ending share price of $72.

Compute the percentage total return. (Round your answer to 2 decimal places. (e.g., 32.16))

Total return %
Answer: 20.16

7.Stock Y has a beta of 1.4 and an expected return of 16.5 percent. Stock Z has a beta of 0.7 and an
expected return of 9.8 percent. If the risk-free rate is 5.9 percent and the market risk premium is 6.9
percent, the reward-to-risk ratios for stocks Y and Z are and percent, respectively. Since the SML reward-
to-risk is percent, Stock Y is and Stock Z is(undervalued or overvalued?) . (Round your answers to 2
decimal places. (e.g., 32.16))

Answer: the reward-to-risk ratios for stocks Y and Z are 7.57 and 5.57 percent, respectively. Since the
SML reward-to-risk is 6.90 percent, Stock Y is undervalued and Stock Z is overvalued
8. A stock has an expected return of 18 percent, its beta is 1.45, and the risk-free rate is 4 percent. What
must the expected return on the market be? (Round your answer to 2 decimal places. (e.g., 32.16))

Market expected return %

Answer: 13.66

9. A stock has a beta of 1.14, the expected return on the market is 10 percent, and the risk-free rate is
3.5 percent. What must the expected return on this stock be? (Round your answer to 2 decimal places.
(e.g., 32.16))

Expected return %
Answer: 10.91

10.
Consider the following information:

Rate of Return If State Occurs

State of Probability of
Economy State of Economy Stock A Stock B
Recession 0.21 0.06 0.21
Normal 0.58 0.09 0.08
Boom 0.21 0.14 0.25

Calculate the expected return for the two stocks. (Round your answers to 2 decimal places. (e.g., 32.16))

Expected return
Stock A %
Stock B %
Answer: stock A = 9.42

Stock B = 5.48%

Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and round
your final answers to 2 decimal places. (e.g., 32.16))

Standard deviation
Stock A %
Stock B %

Answer: stock A = 2.64

Stock B = 15.20

11.Consider the following information:

State of Economy Probability of

State of Economy Portfolio Return
if State Occurs
Recession 0.17 0.13
Normal 0.53 0.14
Boom 0.30 0.22

Calculate the expected return. (Round your answer to 2 decimal places. (e.g., 32.16))

Expected return %

Answer: 11.81

12.
What are the portfolio weights for a portfolio that has 140 shares of Stock A that sell for $50 per share
and 120 shares of Stock B that sell for $40 per share? (Round your answers to 4 decimal places. (e.g.,
32.1616))

Portfolio weights
Stock A
Stock B
Answer:

Stock A = 0.5932

Stock B = 0.4068

13.
A stock has an expected return of 13.4 percent, the risk-free rate is 9 percent, and the market risk
premium is 10 percent. What must the beta of this stock be? (Round your answer to 2 decimal places.
(e.g., 32.16))

Beta of stock
Answer: 0.44

14.
You own a stock portfolio invested 40 percent in Stock Q, 25 percent in Stock R, 20 percent in Stock S,
and 15 percent in Stock T. The betas for these four stocks are 0.93, 1.10, 1.10, and 1.28, respectively.
What is the portfolio beta? (Round your answer to 2 decimal places. (e.g., 32.16))
Portfolio beta
Answer: 1.06

15.You own a portfolio that has $2,500 invested in Stock A and $3,500 invested in Stock B. If the
expected returns on these stocks are 10 percent and 13 percent, respectively, what is the expected
return on the portfolio? (Round your answer to 2 decimal places. (e.g., 32.16))

Portfolio expected return %

Answer: 11.75