Question

Part 1: Dallas Star Inc. 's stock has a 35% chance of producing a 10% return, and a 60% chance of producing a 15% return. What is the firm's expected rate of return? What is the firm's Standard Deviation? What is the firm's Coefficient of Variation? Part 2: Calculate the required rate of return for Dallas Star Inc., assuming that (1) investors expect a 3.0% rate of inflation in the future, (2) the nominal risk-free rate is 5.0%, (3) expected market return is 11% and (4) the firm has a beta of 1.50. (Hint: You need to find out market risk premium first.)

Answer 1

PART1:

The expected return is the profit or loss that the investor anticipates on the investment.

Formula= p1*r1+p2*r2+......+pn*rn

where p is probability and r is return

so expected return = 0.35*0.10+0.60*0.15

=0.035+0.09

=0.125 that is 12.5%

For variance and standard deviation i have uploaded the image.. please check it

PART 2:

Required return of rate is the minimum return that the investor is expecting to receive on their investment.

Formula:

RRR (Required rate of return) = Rf+B(Rm-Rf)

where Rf is risk free rate

B is beta

Rm is market return

Therefore RRR= 5+1.50(11-5)

=5+9

=11%.