Problem 6-5 Expected Return: Discrete Distribution A stock\'s return has the fol
ID: 2637866 • Letter: P
Question
Problem 6-5
Expected Return: Discrete Distribution
A stock's return has the following distribution:
Calculate the stock's expected return. Round your answer to two decimal places.
%
Calculate the standard deviation. Round your answer to two decimal places.
%
Suppose rRF = 3%, rM = 10%, and rA = 12%.
Calculate Stock A's beta. Round your answer to two decimal places.
If Stock A's beta were 1.9, then what would be A's new required rate of return? Round your answer to two decimal places.
%
Company's Products Probability of This
Demand Occurring Rate of Return if This
Demand Occurs (%) Weak 0.1 -45% Below average 0.2 -8 Average 0.4 14 Above average 0.2 35 Strong 0.1 70 1.0
Explanation / Answer
Portfolio Expected Return (sum of expected return) =
(B)
Actual return = risk free rate + Beta * Risk premium
if rM is market return,
rA = rRf + Beta*(rM - Rf)
12 = 3 + beta * (10 - 3)
Beta = 1.28
or if rM is risk premium then,
rA = rRf + Beta * rM
12 = 3 + Beta*10
Beta = 0.90
(C)
If rM is market return,
rA = 3 + 1.9*(10-3)
rA = 16.30%
or if rM is risk premium then,
rA = 3 + 1.9*10
rA = 22%
Demand D Probability, P Rate of return, R Expected Return(P*R) Weak 0.1 -45% -4.50% Below Avg 0.2 -8% -1.60% Avg 0.4 14% 5.60% Above avg 0.2 35% 7.00% Strong 0.1 70% 7.00%