Capital Budgeting Unit 4 Assignment
Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution.
1.“Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return”?
2.“Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired”.
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”.
4.“If the risk-free rate is 6 percent and the risk premium is 5 percent, what is the required return”?
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”?
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”?
o 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% |
8 FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 300 shares of FedEx, what was your dollar return and percent return”?
9 “Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent”.
10 “Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent”.
a. Before solving this problem, calculate the coefficient of variation.
11 “Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald’s earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 20 percent Valero Energy, and 50 percent McDonald’s, what is your portfolio return”?
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