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).**

Jeff Inc.’s stock has a 50% chance of producing a 70% return, a
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Part 2: Calculate the required rate of return for Dallas Star
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