o Sprint 6:43 PM o 52% ezto.mheducation.com C connect FIN 210: FIN 210 Fall 2015
ID: 2711146 • Letter: O
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o Sprint 6:43 PM o 52% ezto.mheducation.com C connect FIN 210: FIN 210 Fall 2015 Tuesday FINANCE Question 4 (of 5) 20.00 points Problem 11-20 Risk and Return (LO2, 4) A stock will provide a rate of return of either-31% or 39%. a If both possibilities are equally likely, calculate the stock's expected return and standard deviation. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected return Standard deviation olf Treasury bills yield 4% and investors believe that the stock offers a satisfactory expected return, what must the market risk of the stock be? (Enter your answer as a whole percent.) Market risk Difficulty Intermediate Learning Objective: 11-0 between specific risk, wh diversified away, and ma WorksheetExplanation / Answer
a.1
Calculation Stock's Expected return:
Situation
Return
Possibility
A
B
A*B
Bad
-31%
50%
-15.50%
Good
39%
50%
19.50%
Expected Return
4.00%
a.1
Calculation Stock's Standard Deviation :
Situation
Return
Possibility
Expected Return
Deviation
Deviation ^2
A
B
C
D=A-C
E=D*D
E*B
Bad
-31%
50%
4.00%
-35.00%
12.25%
6.13%
Good
39%
50%
4.00%
35.00%
12.25%
6.13%
Sum of E*B
12.25%
Standard Deviation = (Sum of E*B)^(1/2)
35%
b.
Calculation of Market risk:
Expected return
4.00%
Risk Free rate
4%
Marker risk (4%-4%)
0
a.1
Calculation Stock's Expected return:
Situation
Return
Possibility
A
B
A*B
Bad
-31%
50%
-15.50%
Good
39%
50%
19.50%
Expected Return
4.00%
a.1
Calculation Stock's Standard Deviation :
Situation
Return
Possibility
Expected Return
Deviation
Deviation ^2
A
B
C
D=A-C
E=D*D
E*B
Bad
-31%
50%
4.00%
-35.00%
12.25%
6.13%
Good
39%
50%
4.00%
35.00%
12.25%
6.13%
Sum of E*B
12.25%
Standard Deviation = (Sum of E*B)^(1/2)
35%
b.
Calculation of Market risk:
Expected return
4.00%
Risk Free rate
4%
Marker risk (4%-4%)
0
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