Question

ß. The expected return on Delta Computers stock is 14.8 percent. If the risk-free rate is 2.5 percent and the expected return on the market is 10 percent, then what is Delta's beta? A) 1.64 B) 1.48 C) 1.10 D) 1.53 4. Pedro wants to invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Pedro is being promised? (Rounded to the nearest percent.) A) 18% B) 20% C) 12% D) 25%

Answer 1

3.

Given Expected return of stock R_e = 14.8%

Risk free return R_f = 2.5%

Market rate of return R_m = 10%

R_e - R_f = Beta * (R_m - R_f)

Beta = (14.8 – 2.5)/ (10-2.5)

Beta = 12.3/7.5 = 1.64

Beta = 1.64 = option A

4.

Given

Amount invested PV= $25,000

Time = 6 years

Amount after six years FV = $25,000 * 3 = $75,000

Interest rate on investment = r

Duration of investment = n= 6 years. Present value of investment

PV= FV/(1+r)ⁿ

25000 = 75000/ (1+r)⁶

(1+r)⁶ = 75000/25000

(1+r)⁶ = 3

(1+r) = 3^1/6 = 1.200937

r= 1.200937 – 1

rate of return = 20% (rounded off to nearest percent) = option B