Sorry again this question has already been posted, I just missed posting Problem

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Sorry again this question has already been posted, I just missed posting Problem 1-4. So here is the entire problem. I promise. Thanks.

Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?

Problem 1-2

Assume the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

Problem 1-3

Suppose rRF = 5% rM = 10%, and rA = 12%

Calculate stock A’s beta.

If stock A’s beta were 2.0, then what would be A’s new required rate of return?

Problem 1-4

Thess Industries just paid a dividend of $1.50/ share (i.e., D0 = $1.50) The dividend is expected to grow 5%/ yr for the next 3 years and then 10%/ yr thereafter. What is the expected dividend/ share for each of the next 5 years?

Explanation / Answer

Coefficient of variation = Standard deviation / Expected return

For Security A, Coefficient of variation = 35% / 7% = 5.00

For Security B, Coefficient of variation = 10% / 12% = 0.83

As such, security A is risker as the risk per unit of return is higher in case of security A.

Problem 1-2

Required rate = 6% + 0.7 * (13% - 6%)

= 10.90%

Problem 1-3

Stock A's beta = (12% - 5%) / (10% - 5%)

= 1.4

Problem 1-4

Year 1 = $1.50 * (1+5%) = $1.58

Year 2 = $1.58 * (1+5%) = $1.65

Year 3 = $1.65 * (1+5%) = $1.74

Year 4 = $1.74 * (1+10%) = $1.91

Year 5 = $1.91 * (1+10%) = $2.10

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