Question

1. Shell Enterprises has a beta of 1.5, the risk-free rate is 4.2%, and the required rate of return on the market is 9.3%. What is Sell’s required rate of return?

2. Jeff Inc.’s stock has a 50% chance of producing a 70% return, a 50% chance of producing a -25% return. What is the coefficient of variation(CV) of this stock?

Answer 1

1.Required return=risk free rate+beta*(market rate-risk free rate)

=4.2+1.5*(9.3-4.2)=11.85%

2.

Expected return=Respective return*Respective probability

=(0.5*70)+(0.5*-25)=22.5%

Probability	Return	Probability*(Return-Expected Return)^2
0.5	70	0.5*(70-22.5)^2=1128.125
0.5	-25	0.5*(-25-22.5)^2=1128.125
		Total=2256.25%

Standard deviation=[Total Probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(2256.25)^(1/2)

=47.5%

Coefficient of variation=Standard deviation/Expected return

=47.5/22.5

which is equal to

=2.11(Approx).