# 84355_1_FINC-600-ASSGN-3

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Complete the following problems in either Microsoft Word or Excel.

Your work must be organized. Highlight your final answer.

Chapter 7:

7-2: The following table shows the nominal returns on U.S. stocks and the rate of inflation. a. What was the standard deviation of the market returns?

- Calculate the average real return.

Year Nominal Return (%) Inflation (%)

2004 +12.5 +3.3

2005 +6.4 +3.4

2006 +15.8 +2.5

2007 +5.6 +4.1

2008 -37.2 +0.1

7-7: Suppose the standard deviation of the market return is 20%.

- What is the standard deviation of returns on a well-diversified portfolio with a beta of 1.3?
- What is the standard deviation of returns on a well-diversified portfolio with a beta of 0?
- A well-diversified portfolio has a standard deviation of 15%. What is its beta?
- A poorly diversified portfolio has a standard deviation of 20%. What can you say about its beta?

Chapter 8:

Stock Beta Expected Return

Amazon 2.16 15.4

Ford 1.75 12.6

Dell 1.41 10.2

Starbucks 1.16 8.4

Boeing 1.14 8.3

Disney .96 7.0

Newmont .63 4.7

Exxon Mobil .55 4.2

Johnson & Johnson .50 3.8

Campbell Soup .30 2.4

8-6: Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas above.

- Calculate the expected return from Dell.
- Find the highest expected return that is offered by one of these stocks.
- Find the lowest expected return that is offered by one of these stocks.
- Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
- Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?

8-8: Consider a three-factor APT model. The factors and associated risk premiums are:

Factor Risk Premium

Change in GNP 5%

Change in energy prices -1

Change in long-term interest rates +2

Calculate expected rates of return on the following stocks. The risk-free interest rate is 7%.

- A stock whose return is uncorrelated with all three factors.
- A stock with average exposure to each factor (i.e., with b = 1 for each).
- A pure-play energy stock with high exposure to the energy factor (b = 2) but zero expo- sure to the other two factors.
- An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = -1.5 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.)

__Show all your work to earn partial credit.__