Question

Question 1: Cooley Company's stock has a beta (b) of 1.28, the risk-free rate (rRF) is 1.25%, and the market risk premium (RPM) is 5.50%. a. What does the beta measure? Give a short answer in 1 sentence. b. What is market risk premium? Give a short answer in 1 sentence. c. Calculate the firm's required rate of return? Show the step-by-step calculation and circle your answer. (Hint: Required return = rRF + b(RPM)) Question 2: Consider the following information for Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Show the step-by-step calculation and circle your answer. Assume that Amazon company has one-third of its funds invested in each of the three stocks. The risk-free rate (rRF) is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (RPM =rM-rRF)? (Hint: Chose any stock, substitute the given values into the equation Required return = rRF + b(RPM)), and find RPM. Note that “Required return” is shown as “Expected return” in the table above.) b. What is the beta of Amazon? (Hint: find portfolio beta.) c. What is the required return of Amazon? (Hint: use the results from a and b questions and plug in to the equation of finding a Required return of the portfolio.) d. Would you expect the standard deviation of Amazon to be less than 15%, equal to 15%, or greater than 15%? Explain. Give a short answer in 1-2 sentences. Question 3: Use the following historical returns of stocks A and B and answer the questions. Show the step-by-step calculation and circle your answer. Then use your results from questions a, b, c, d and fill out the table for Mean, Standard Deviation (STDEV), Coefficient of variation (CV), and Portfolio. Year Stock A’s Returns (%), rA Stock B’s Returns (%), rB Portfolio (%) 2013 -18 -14.5 2014 33 21.8 2015 15 30.5 2016 -0.5 -7.6 2017 27 26.3   

Answer 1

measures the Da Beta the umystematic risk of stock, ie, the risk which is inheunt to company of industry & which can be diversied away. b) Market Risk premium is the premium risk free sate for taking extra risk of buying stock form stock market o = 1:25+ 1628 (5.50-625) 6.690). over rut ß(Rm-88

I can only answer 1 question at a time so I am solving question 1. Please do rate me and mention doubts in the comments section.