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?

 

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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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