6. Returns on an investment are uncertain. You estimate the likelihood of alternative returns based on the estimated probabilities of possible outcomes:
Outcome Return Estimated Probability of Outcome
1 3% .05
2 7% .25
3 10% .40
4 13% .25
5 17% .05
a. Calculate the expected return.
b. Calculate the standard deviation of the return
7. Dublin Plastics Inc.’s stock is selling for $17.60. Your research suggests it will pay dividends of $2.00 next year and $2.80 the following year, after which its stock price will have peaked at $21.00. You require a return of 20% on similar investment risk. Should you buy now and sell when the price reaches $21.00?
8. A four-stock portfolio is made up as follows:
A $15,300 .5
B $28,700 .9
C $19,600 1.2
D $10,400 1.7
a. Calculate the portfolio’s beta
b. How relatively risky is this portfolio? Could the portfolio have more risk? Could the portfolio have less risk? Explain.
9. Given the following information, calculate the required return on MNO Corporation’s common stock:
? MNO Corp.’s Common Stock Beta (ß) = 0.9
? Risk-free rate = 5%
? Required return on the overall market = 11%