Chapter 6 The Meaning and Measurement of Risk and Return

37) You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citizens Bank?

A) 11.15%

B) 15.39%

C) 16.75%

D) 20.75%

38) Answer the questions below using the following information on stocks A, B, and C.

	A	B	C
Expected Return	20%	21%	10%
Standard Deviation	12%	10%	10%
Beta	1.8	2.2	0.8

Assume the risk-free rate of return is 3% and the expected market return is 12%

a. Calculate the required return for stocks A, B, and C.

b. Assuming an investor with a well-diversified portfolio, which stock would the investor want

to add to his portfolio?

c. Assuming an investor who will invest all of his money into one security, which stock will the investor choose?

39) The expected return for the market portfolio is 13%, the expected return on U.S. Treasury Bills is 2%, and the expected return on AAA-rated short-term corporate bonds is 7%. Calculate the required return for a stock with a beta equal to 1.5.

40) Security A has an expected rate of return of 29.8 percent and a beta of 3.1. Security B has a beta of 1.70. If the Treasury bill rate is 5 percent, what is the expected rate of return for Security B?

41) Bankers Corp has a very conservative Beta of .7, while Biotech Corp has a Beta of 2.1. Given that the T-bill rate is 5%, and the market is expected to return 15%, what is the expected return of Bankers Corp, Biotech Corp, and a portfolio composed of 60% of Bankers Corp and 40% Biotech Corp?

a. Solve this problem first by weighting the Betas to calculate a portfolio Beta, and then using CAPM to calculate the portfolio expected return.

b. Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return.

c. Why is Biotech Corp's expected return NOT three times that of Bankers Corp?

42) Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%, but would also increase its beta from 1.2 to 1.8. If the risk free rate is 5% and the return on the market is expected to be 10%, should Redesign change its strategy?