LLANO, HIEDELYN I.

ACN 2107-3 Financial Management Midterms

STRONG TOWER INC. BRIGHT FUTURE CORP.
(Deviation^2) * (Deviation^2) *
Demand Probability Rate of Return Product Deviation Deviation^2 Prob Demand Probability Rate of Return Product Deviation Deviation^2 Prob
Strong 0.25 90% 23% 90.0% 0.8100 0.2025 Strong 0.25 40% 10% 40.0% 0.1600 0.0400
Normal 0.4 40% 16% 40.0% 0.1600 0.0640 Normal 0.4 42% 17% 42.0% 0.1764 0.0706
Weak 0.35 -25% -9% -25.0% 0.0625 0.0219 Weak 0.35 10% 4% 10.0% 0.0100 0.0035

r̂ = 29.75% Σ=variation= 0.2884 r̂ = 30.30% Σ=variation= 0.1141

√variation= 0.5370 √variation= 0.3377
σ% = 53.70% σ% = 33.77%

σ Return - Risk-Free rate σ Return - Risk-Free rate

r̂ σ r̂ σ
53.70% 29.75% - 2% 33.77% 30.30% - 2%
29.75% 44.71% 30.30% 14.93%
Coefficient = 1.50 Sharpe= 0.62 Coefficient = 0.49 Sharpe= 1.90

66 67 68

Risk-free rate + Premium Risk-free rate + (Market Risk Premium)(Beta) Risk-free rate + (Market Risk Premium)(Beta)
3% + 2% 3% + (2%)(1) 3% + (2%)(2)
RRR = 5% 3% + 2% 3% + 4%
RRR = 5% RRR = 7%

68 69

Risk-free rate + (Market Risk Premium)(Beta) Required return w/ beta of 1 - Required return with beta of 0.5 Risk-free rate + (Market Risk Premium)(Beta)
3% + (2%)(2) 5% - 4% = 1% 3% + (2%)(0.5)
3% + 4% 3% + 1%
RRR = 7% RRR = 4%