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Chapter 8 Solution

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8-1 = (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%) = 11.40% 2 = (-50% – 11.40%)2(0.1) + (-5% – 11.40%)2(0.2) + (16% – 11.40%)2(0.4) + (25% – 11.40%)2(0.2) + (60% – 11.40%)2(0.1) 2 = 7.12%; = 26.69% CV = 26.69%/11.40% CV = 2.34

8-2 | Investment | Ratio | Beta | | A | $ 35,000 | 47% | 0.8 | 0.37 | B | $ 40,000 | 53% | 1.4 | 0.75 | | $ 75,000 | 100% | | 1.12 |

The portfolio’s beta is 1.12.

8-3 r = rRF + (rM – rRF)b = 6% + (13% – 6%) (0.7) = 10.9%

8-4 r = rRF + (rM – rRF)b = 5% + (11% – 5%) (1.2) = 12.20%

8-5
a.)
r = rRF + (market risk premium)b
11% =7% + (4%)(beta)
Beta = (11%-7%)/4%
Beta = 1.0

b.) r = rRF + (market risk premium)b =7% + (6%) (1) r = 13%
The stock’s required rate of return will increase to 13%. There is an increase of 2% on the required rate of return.
8-6
Computations for stock Y = (0.1)(-35%) + (0.2)(0%) + (0.4)(20%) + (0.2)(25%) + (0.1)(45%) = 14 % 2 = (-35% – 14 %)2(0.1) + (0% – 14 %)2(0.2) + (20% – 14 %)2(0.4) + (25% – 14 %)2(0.2) + (45% – 14 %)2(0.1) 2 = 4.14 %; = 20.35% CV = 20.35%/14% CV = 1.45 Computations for stock X = (0.1)(-10%) + (0.2)(2%) + (0.4)(12%) + (0.2)(20%) + (0.1)(38%) = 12 % 2 = (-10% – 12 %)2(0.1) + (2% – 12 %)2(0.2) + (12% – 12 %)2(0.4) + (20% – 12 %)2(0.2) + (38% – 12 %)2(0.1) 2 = 1.49 %; = 12.20% CV = 12.20%/12%
CV = 1.07

8-7 r = rRF + (rM – rRF)b = 6% + (14% – 6%) (0.76) =…...

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