Estimating Risk and Return

  1. Based on the probability and percentage of return for the three economic states in the table below, compute the expected return.


  2. Economic StateProbabilityPercentage of Return
    Fast Growth0.1060
    Slow Growth0.5030
    Recession0.40-23
  3. If the risk-free rate is 7 percent and the risk premium is 4 percent, what is the required return?
  4. Suppose that the average annual return on the Standard and Poor’s 500 Index from 1969 to 2005 was 14.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years?
  5. Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomco’s required return? Use the capital asset pricing model (CAPM) to calculate Conglomco’s required return.
  6. Calculate the beta of a portfolio that includes the following stocks:
    • Conglomco stock, which has a beta of 3.9 and comprises 35 percent of the portfolio.
    • Supercorp stock, which has a beta of 1.7 and comprises 25 percent of the portfolio.
    • Megaorg stock, which has a beta of 0.3 and comprises 40 percent of the portfolio.
 
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