Question

1. a) Scenario Modeler’s prospective stock has a 15% chance of producing a 65% return, a 25% chance of producing a 22% return, a 40% chance of producing a 7% return, and a 20% chance of producing a –28% return. What is the firm’s coefficient of variation of return?

1. b) High Growth’s annual stock returns over the last 7 years are: 27%, –18%, 34%, 11%, –28%, 55%, and –15%. What is High Growth’s standard deviation of return?

1. c) Hedge Funds ‘R Us has a $50 million portfolio consisting of two stocks: Highly Leveraged Retailer (HLR) with a beta of 4.25 and Steady Eddie Utility (SEU) with a beta of 0.85. The risk-free rate is 3.75%, and the market risk premium is 6.50%. If Hedge Funds ‘R Us invests $20 million in HLR and the balance of its funds in SEU, what it the Hedge Fund's required rate of return according to CAPM?

1. d) Deep Value, Inc.’s annual stock returns for the last ten years are: –5%, 15%, 11%, 18%, –8%, 9%, 16%, –3%, –2%, and 15%. The Market Index’s annual returns for the same ten years are: 10%, 22%, 9%, 13%, –7%, 8%, 15%, –13%, –12%, and 18%. What is Deep Value’s beta coefficient?

Answer 1

1)

a)

Expected Probability return Return ()IPPO u] rxP(r)- 65% 22% 796 28% 0.15 0.25 0.40 0.20 9.8%) 53.50% 5.5%) 10.50% 2.8%-4.50% 5.6%-39.50% 28.62% 1.10% 0.20% 15.60% 4.29% 0.28% 0.08% 3.12% Expected return 12.45% Variance (ơ"2 Standard deviation (o 7.77 27.88%

Coefficient of variation Standard deviation Mean 2.24 -27.88%/12.45% Coefficient of variation