1. Consider the following: A firm’s operations are 45% GREATER than an average firm in the market. Relevant government securities trade @ 3.7%; and the current average return on the market as a whole is 9.1%. What rate of return must the firm pay to attract investors?
2. How does your answer to 1. above change if the company’s operations stabilize and its risk relative to the market goes down to 110%; AND the expected return on the market GOES DOWN to 7.9%?
3. Consider the following information:
State of Prob of State Rate of Return if State Occurs
Economy of Economy Stock A Stock B Stock C
Boom .35 .07 .15 .33
Bust .65 .13 .03 -.06
What is and expected return and variance of a portfolio which is equally weighted in investments of each of the three stocks?
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