The Standard Deviations and expected rates of return, r ^, r with a hat, are listed below for 5 stocks. Calculate the Coefficient of Variations for each.
Stock STANDARD DEVIATIONS EXPECTED R OF R, r^ CV
A 5% 20% ____
B 6% 24% ____
C 7% 28% ____
D 8% 32% ____
E 20% 80% ____
Which stock is the riskiest stock? ____________
Explain
The risk free rate on a stock is 3%, the required rate in the market is 7%, and the beta is 1.6. This is the original position. Calculate the required rate of return, r.
Based on the above, now assume that inflation is expected to increase by 2%. Calculate the required rate of return. 2 points, show work
What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down
What happens to the slope? Circle one: Slope remains the same or Slope gets steeper or Slope gets flatter
Now assume that inflation is expected to decrease by 1%. Calculate the required rate of return.
What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down
What happens to the slope? Circle one: Slope remains the same or Slope gets steeper or Slope gets flatter
Now assume that investors are fearful, uneasy, with the current market situation and require a higher rate of return in the market. Thus, rm increases by 2.5%. Calculate the required rate of return.
What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down
What happens to the slope? Circle one:Slope remains the same or Slope gets steeper or Slope gets flatter
Now assume that investors are confident, at ease, with the current market situation and require a lower rate of return in the market. Thus, rm decreases by 1%. Calculate the required rate of return.
What happens to the SML? Circle one:Shifts Up or Shifts Down or Pivots Up or Pivots Down
What happens to the slope? Circle one:
Slope remains the same or Slope gets steeper or Slope gets flatter
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