BUS3062U04A2 (***** 100% Correct With Calculation *****)
1. "Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return" (Cornett, Adair, & Nofsinger, 2014, p. 250)?
2. "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired" (Cornett, Adair, & Nofsinger, 2014).
3. Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns" (Cornett, Adair, & Nofsinger, 2014).
4. "If the risk-free rate is 6 percent and the risk premium is 5 percent, what is the required return" (Cornett, Adair, & Nofsinger, 2014, p. 251)?
5. "The average annual return on the Standard and Poor's 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years" (Cornett, Adair, & Nofsinger, 2014, p. 251)?
6. "Hastings Entertainment has a beta of 0.24. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings' required return" (Cornett, Adair, & Nofsinger, 2014, p. 251)?
• Use the capital asset pricing model to calculate Hastings' required return.
7. Calculate the beta of your portfolio, which comprises the following items: (a) Olympic Steel stock, which has a beta of 2.9 and comprises 25 percent of your portfolio, (b) Rent-a-Center stock, which has a beta of 1.5 and comprises 35 percent of your portfolio, and (c) Lincoln Electric stock, which has a beta of 0.2 and comprises 40 percent of your portfolio (Cornett, Adair, & Nofsinger, 2014).
Economic State Probability Return
Fast Growth 0.30 40%
Slow Growth 0.50 10%
Recession 0.20 ?25%