Answers:

6-2:

0.467x0.8 +0.53x1.4=1.12

6-3:

rM = 5% + (6%)1 = 11%.
r when b = 1.2 = ?
r = 5% + 6%(1.2) = 12.2%.

6-4:

rRF = 6%; rM = 13%; b = 0.7; r = ?

r = rRF + (rM – rRF)b
= 6% + (13% – 6%)0.7
= 10.9%.
6-6: M J m2 j2 m3 j3 m4 j4 m5 j5

0.1 (10) (35) 1 3.5 4 14 16 196 1.6 19.6

0.2 2 0 .4 0 12 21 144 447 28.8 89.4

0.4 12 20 4.8 8 2 1 4 1 1.6 0.4

0.2 20 25 4 5 6 4 36 16 7.2 3.2

0.1 38 45 3.8 4.5 24 24 576 576 57.6 57.6

14 21 96.8 170.2

X s.d:9.84

Y s.d: 13.046

Coefficient of variation y: 96.9%

6-5:

(a) E(rM) = 0.3*15%+0.4*9%+0.3*18% = 13.5% E(rj) = 0.3*20%+0.4*5%+0.3*12% = 11.6%

(b) Var(rM) = 0.3*(0.15-0.135)^2+0.4*(0.09-0.135)^2+0.3*(0.18-0.135)^2 = 0.001485 SD(rM) =

SQRT(0.001485) = 3.85% Var(rj) = 0.3*(0.20-0.116)^2+0.4*(0.05-0.116)^2+0.3*(0.12-0.116)^2 =
0.003864 SD(rj) = SQRT(0.003864) = 6.22%
(c) Correlation =0.00162/[(0.0385)*(0.0622)] = 0.6765

6-7:

12=5+(10-5)xZ

7\5=z

b) 15

6-8:

ri = rRF + bi x (rM – rRF) so

ri = 9% + 1.3 x (14% - 9%) = 9% + 1.3 x 5% = = 15.5%

(1) rRF = 10%

ri = 10% + 1.3 x 5% = 16.5%

(2) rRF = 8%

ri = 8% + 1.3 x 5% = 14.5%

) rRF = 9%, rM = 16%

ri = 9% + 1.3 x (16% - 9%) = 18.1%

(2) rRF = 9%, rM = 13%

ri = 9% + 1.3 x (13% - 9%) = 14.2%

6-9

1.12x20=22.4
22.4-1=21.4+1.75=23.15/20=1.16

6-10:

First, you need to know that the Capital Asset Model Pricing (CAPM) formula to determine the rate of
return (ROR) of a risky asset (in your case, an investment fund) is:
Ra = Rf + B * (Rm - Rf)
. . . where
Ra is the required ROR of the risky asset
Rf is the risk free return (6%)
Rm is the expected ROR of the broad market (14%)
B is beta (% varies by stock)
Next, if your fund consisted of just one stock, it would be easy, but since you have 4 stocks, you have to
determine the weight that each stock contributes to CAPM:
A: 400,000/4,000,000 = 10%
B: 600,000/4,000,000 = 15%
C: 1,000,000/4,000,000 = 25%
D: 2,000,000/4,000,000 = 50%
So now we can plug in the numbers to the CAPM formula, allowing for the contributing weight of each
stock. Note that Rm - Rf = 0.14 - 0.06 = 0.08.
Ra = 0.10 * (0.06 + 1.5 * 0.08) + 0.15 * (0.06 - 0.50 * 0.08) + 0.25 * (0.06 + 1.25 * 0.08) + 0.50 * (0.75 *
0.08) = 0.091
The fund's required ROR is 9.10%.

6-11:
1/20= 5%
older stock contribution of risk= 0.9*0.05=0.045
New stock contribution of risk= 1.4*0.05=0.07
Now just simply eliminating the effect of older beta and adding the
contribution of new beta
1.1-0.045+0.07=1.125