Systemic Risk and Expected Rate of Return
1.(Systemic Risk and Expected Rate of Return) Calculate the expected increase in the value of each firm’s shares if the market portfolio were to increase by 10%. Perform the same calculation where the market drops by 10%.
Company Beta Estimate Expected Increase
Computer Firms
A 2.68 %(round 2 decimal places)
B 1.45 %
C 1.32 %
Utility Firms
D 0.72 %
E 0.37 %
F 0.82 %
Company Beta Estimate Expected Decrease
Computer Firms
A 2.68 %(round 2 decimal places)
B 1.45 %
C 1.32 %
Utility Firms
D 0.72 %
E 0.37 %
F 0.82 %
Which set of firms has the most volatile stock returns Computer or Utilities?
2.(Annuity Payments)Bill purchased a house for $70,000. He put $25,000 down and agreed to pay the rest off over the next 15 years in 15 equal payments that include principal payments plus 12% compound interest on the unpaid balance. What will these equal payments be?
a) How much does he need to borrow. (Should be $45,000)
b) How much will the 15 equal payments be? Round to nearest cent.
3.(Calculating Rates of Return) On December 24, 2007, the S&P 500 index was 1,410 and on December 24, 2008, the index was 860. If the average dividend paid on the stocks in the index is 4% of the value of the index at the beginning of the year, what is the rate of return earned on the S&P index?
4. Portfolio Beta and Capital Asset Pricing Model(CAPM).
Asset Beta First Portfolio Second Portfolio
A 2.40 20% 30%
B 0.90 20% 30%
C 0.60 30% 20%
D -1.60 30% 20%
a.)What is the beta for each portfolio?( I have 0.36 for First and 0.79 for Second)
b.) If the risk free rate on interest were 4.5% and the market risk premium were 7.5%, what rate of return would you expect to earn from each portfolio?
