The risk-free rate is 3.4 percent.  Stock A has a beta = 1.8 and Stock B has a beta = 1.1. Stock A has a required return of 7 percent.  What is Stock B’s required return?

Given the following data, find the expected rate of inflation during the next year. ·         r* = real risk-free rate = 4.60%. ·         Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists. ·         Default risk premium on 10-year, A-rated bonds = 1.5%. ·         Liquidity premium = 0%. ·         Going interest rate on 1-year T-bonds = 6.70%.

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                2.90% 2 Years              4.30% 3 Years              5.20% 4 Years              5.50% 5 Years              6.10% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 3-year securities, 2 year from today?

Given the following probability distribution, what are the expected return and the standard  deviation of returns for Security J? State                      Pi                              rj     1                          0.2                           5%     2                          0.1                           6%     3                          0.7                           15%

Keys Corporation’s 5-year bonds yield 8.1%, and 5-year T-bonds yield 6.8%. The real risk-free rate is r* =  1.5%, the inflation premium  for 5 years bonds is  IP = 4.9%, the default risk premium for Keys’ bonds is DRP = 0.54% versus  zero for T-bonds, and the maturity risk premium for all bonds is found with  the formula  MRP =  (t – 1)*0.1%, where t = number of years to maturity.  What  is the liquidity premium (LP) on Keys’ bonds?

Suppose the real risk-free rate is 4.8%,  the average future inflation rate is  2.4%, and a maturity premium of 0.1% per year to maturity applies, i.e., MRP =  0.1%(t), where t is the years to maturity.  What rate of return would you  expect on a 4-year Treasury security, assuming the pure expectations theory is NOT valid?

The risk-free rate is 3 percent.  Stock A has a beta = 1.1 and Stock B has a beta = 1.9. Stock A has a required return of 8.3 percent.  What is Stock B’s required return?

The risk-free rate is 3.4 percent.  Stock A has a beta = 1.8 and Stock B has a beta = 1.1. Stock A has a required return of 7 percent.  What is Stock B’s required return?

Suppose the real risk-free rate is 3.9%, the average future inflation rate is  4.7%, a maturity premium of 0.06% per year to maturity applies, i.e., MRP =  0.06%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 0.7% and a default risk premium of 0.8% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 7-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

You have been scouring The Wall Street Journal looking for stocks that are “good values”  and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 4  percent and the market risk premium (rM – rRF) is 2.7 percent.  Which security would be the best a. Expected Return = 9.01%, Beta = 1.6 b. Expected Return = 7.06%, Beta = 0.1 c. Expected Return = 5.04%, Beta = 0.4 d. Expected Return = 8.74%, Beta = 0.5 e. Expected Return = 11.50%, Beta = 1.5