1. Bautista’s stock has a 50% chance of producing a 25% return, a 30% chance of producing a
10% return, and a 20% chance of producing a - 28% return. What is the firm's expected rate
of return?
2. Dolosa Inc. is considering a capital budgeting project that has an expected return of 25% and
a standard deviation of 30%. What is the project's coefficient of variation?
3. Gacutno believes the following probability distribution exists for its stock. What is the
coefficient of variation on the company's stock?
State of the
Profitability of
Stock’s Expected
Economy
State Occurring
Return
Boom
0.45
25%
Normal
0.50
15%
Recession
0.05
5%
4. An analyst has estimated how a particular stock’s return will vary depending on what will
happen to the economy:
State of the
Profitability of
Stock’s Expected
Economy
State Occurring
Return
Recession
0.10
-60%
Below Average
0.20
-10%
Average
0.40
15%
Above Average
0.20
40%
Boom
0.10
90%
What is the coefficient of variation on the company’s stock?
5. Trasmil Supplies’ stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate
is 4.30%. What is the required rate of return on the market?
6. A stock has an expected return of 12.25 percent. The beta of the stock is 1.15 and the riskfree rate is 5 percent. What is the market risk premium?
7. Calculate the required rate of return for Castillo, Inc., assuming that investors expect a 5
percent rate of inflation in the future. The real risk-free rate is equal to 3 percent and the
market risk premium is 5 percent. Castillo has a beta of 2.0, and its realized rate of return
has averaged 15 percent over the last 5 years.
8. Cruzana Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00%
future inflation rate, and the market risk premium is 4.70%. What is Cruzana’s required rate
of return?
9. Marasigan is holding a stock which has a beta of 2.0 and is currently in equilibrium. The
required return on the stock is 15 percent, and the return on an average stock is 10 percent.
What would be the percentage change in the return on the stock, if the return on an average
stock increased by 30 percent while the risk-free rate remained unchanged?
10.
Orca Corporation has a beta of 2.0, while Reyes Corporation's beta is 0.5. The risk-free
rate is 10 percent, and the required rate of return on an average stock is 15 percent. Now the
expected rate of inflation built into r RF falls by 3 percentage points, the real risk-free rate
remains constant, the required return on the market falls to 11 percent, and the betas remain
constant. When all of these changes are made, what will be the difference in the required
returns on Orca’s and Reyes’ stocks?
11.
Daylusan Company has a beta of 0.70, while Anselmo Company's beta is 1.20. The
required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the
difference between Daylusan’s and Anselmo's required rates of return?
12.
Morales has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The
T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market
during the past 4 years was 10.25%. Investors expect the average annual future return on the
market to be 12.50%. What is the firm's required rate of return?
13. The returns of Marvine Christiane, Inc. (MCI) are listed below, along with the returns on
"the market":
Year MCI
1
-14%
2
16
3
22
4
7
5
-2
Market
-9%
11
15
5
-1
If the risk-free rate is 9% and the required return on MCI’s stocks is 15%, what is the
required return on market? Assume that the market is in equilibrium.
14.
Bansal Corp has P100,000 invested in a 2-stock portfolio. P35,000 is invested in Stock X
and the remainder is invested in Stock Y. X's beta is 1.50 and Y’s beta is 0.70. What is the
portfolio's beta?
15.
What is the portfolio's beta if Boss J holds a P200,000 portfolio consisting of the following
stocks?
Stock
A
B
C
D
Investment
P50,000
P50,000
P50,000
P50,000
P200,000
Beta
0.95
0.80
1.00
1.20
16.
Superales Co. is forming a portfolio by investing P50,000 in stock A which has a beta of
1.50, and P25,000 in stock B which has a beta of 0.90. The return on the market is equal to 6
percent and Treasury bonds have a yield of 4 percent. What is the required rate of return on
the Superales' portfolio?
17.
The P10.00 million mutual fund that Buefano manages has a beta of 1.05 and a 9.50%
required return. The risk-free rate is 4.20%. Buefano now receives another P5.00 million,
which she invests in stocks with an average beta of 0.65. What is the required rate of return
on the new portfolio?
18. Masiglat hold a diversified portfolio consisting of a P10,000 investment in each of 20
different common stocks (i.e., her total investment is P200,000). The portfolio beta is equal
to 1.2. She had decided to sell one of her stocks which had a beta equal to 0.7 for P10,000.
She plans to use the proceeds to purchase another stock which has a beta equal to 1.4. What
will be the beta of the new portfolio?
19.
Alegre’s portfolio consists of P100,000 invested in a stock which has a beta = 0.8, P150,000
invested in a stock which has a beta = 1.2, and P50,000 invested in a stock which has a beta
= 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of
13 percent. This year nothing has changed except for the fact that the market risk premium
has increased by 2 percent (two percentage points). What is the portfolio's current required
rate of return?
20.
Suppose Soriano holds a portfolio consisting of a P10,000 investment in each of 8
different common stocks. The portfolio’s beta is 1.25. Now suppose Soriano decided to sell
one of her stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock
with a beta of 1.35. What would the portfolio’s new beta be?
21.
Gilbuena, a mutual fund manager, has a P40 million portfolio with a beta of 1.00. The
risk-free rate is 4.25%, and the market risk premium is 6.00%. Gilbuena expects to receive an
additional P60 million, which she plans to invest in additional stocks. After investing the
additional funds, he wants the fund’s required and expected return to be 13.00%. What must
the average beta of the new stocks be to achieve the target required rate of return?
22.
Camacho holds the portfolio given in the table below. Camacho plans to sell Stock A
and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta
change?
Stock
A
B
C
D
Total
Investment
P150,000
1.40
50,000
0. 80
100,000
1.00
75,000
1.20
P375,000
Beta
23.
Apostol, Cruz and Co (ACC) Company is managing the account of a large investor. The
investor holds the following stocks:
Stock
Amount Invested Estimated Beta
A
P2,000,000
0.80
B
5,000,000
1.10
C
3,000,000
1.40
D
5,000,000
???
The portfolio’s required rate of return is 17 percent. The risk-free rate, rRF, is 7 percent
and the return on the market, rM, is 14 percent. What is Stock D’s estimated beta?