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BBA
FELLOWS
All of the data provided here is only for educational purpose & not for business.
Nouman Awan
noumanawan@gawab.com
http://www.bbafellows.forum-motion.net
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BBA
FELLOWS
Problems Solutions : Question 01 – 10
1 )
b) There is a 30 percent probability that the actual return will be zero (prob.
E(R) = 0 is 20%) or less (prob. E(R) < is 10%). Also, by inspection we see that the
distribution is skewed to the left.
under the curve of .0968 and .0885 respectively. This means that
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BBA
FELLOWS
there is approximately a 9% probability that actual return will be
9.13%.)
by eye, they will not all be the same. However, students should reach the same
general conclusions.
The beta is approximately 0.5. This indicates that excess returns for the
stock fluctuate less than excess returns for the market portfolio. The stock
has much less systematic risk than the market as a whole. It would be a
defensive investment.
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FELLOWS
4) Req. (RA) = .07 + (.13 - .07) (1.5) = .16
6)
Perhaps the best way to visualize the problem is to plot expected returns
against beta. This is done below. A security market line is then drawn from the
risk-free rate through the expected return for the market portfolio which has a
beta of 1.0
The (a) panel, for a 10% risk-free rate and a 15% market return, indicates
The (b) panel, for a 12% risk-free rate and a 16% market return, shows all
are expected ones. Also, with a change in the risk-free rate, the betas
7)
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9)
10 )
a) Required return = .10 + (.14 - .06)(1.50)
$30 per share for the stock would likely result in our