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1. Given the following information, compute the standard deviation for Investment A:
Payoff
Probability
20%
0.5
10%
0.4
-10%
0.1
2. Based on the information given below, which of the investments would be considered best based on its risk and return relationship? Assume all investors are risk-averse and the investments will be held in isolation, not in a portfolio.
D
E
F
Expected return,
10.0%
18.0%
Standard deviation,
7.0%
12.0%
20.0%
3. Consider the following information, and then calculate the required rate of return for the Scientific Investment Fund. The total investment in the fund is $2 million. The market required rate of return is 15 percent, and the risk-free rate is 7 percent.
Stock
Investment
Beta
A
$200,000
1.50
B
300,000
-0.50
C
500,000
1.25
1,000,000
0.75
4. Moerdyk Company's stock has a beta of 1.40, the risk-free rate is4.25%, and the market risk premium is5.50%.What is the firm's required rate of return?
5. Explain briefly: total risk, diversifiable risk and market risk and why are these concepts important?
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