8.

4
Market: The beta for overall market is always 1
ri = rRF + (RPM)bi = 3.5% + 4% × 1 = 7.5%
Stock: The beta is 0.8
ri = rRF + (RPM)bi = 3.5% + 4% × 0.8 = 6.7%
8.5
a. Beta
ri = rRF + (RPM)bi ↔ 9% = 4.5% + 3%bi ↔ bi = 1.5
b. Required rate of return
ri = rRF + (RPM)bi = 4.5% + 5% × 1.5 = 12%
Stock’s required rate of return would increase to 12%
8.8
ri = rRF + (RPM)bi = rRF + (rM − rRF)bi ↔ 10.5% = 3.5% + (9.5% − 3.5%)bi ↔ bi = 1.17
8.10
Beale Company:
ri = rRF + (RPM)bi = rRF + (rM − rRF)bi = 4.5% + (11% − 4.5%) × 1.1 = 11.65%
Foley Industries:
ri = rRF + (RPM)bi = rRF + (rM − rRF)bi = 4.5% + (11% − 4.5%) × 0.3 = 6.45%
Beale’s required rate of return exceed Foley’s required return by (11.65% - 6.45%) 5.2%
8.13
a. Market risk premium
Stock A
ri = rRF + (RPM)bi ↔ 9.55% = 5.5% + (RPM) × 0.9 ↔ RPM = 4.5%
Stock B
ri = rRF + (RPM)bi ↔ 10.45% = 5.5% + (RPM) × 1.1 ↔ RPM = 4.5%
d. The Fund P’s expected standard deviation will be less than 15% because the returns on all
the
three stocks are correlated positively but they are not perfectly correlated.
8.14
Total value of portfolio = $7,500 x 20 = $150,000
Weight of each stock = $7,500 /$150,000= 0.05
New bp = Current bp − (wselling stock × bselling stock) + (wnew stock × bnew stock)
= 1.25 − (0.05 × 1) + (0.05 × 0.8) = 1.24
8.15
rRF = r∗ + Inflation premium = 6% − 1.5% = 4.5%
Required rate of return of HRI
rH = rRF + (rM − rRF)bi = 4.5% + (10.5% − 4.5%) × 1.6 = 14.1%
Required rate of return of LRI
rH = rRF + (rM − rRF)bi = 4.5% + (10.5% − 4.5%) × 0.8 = 9.3%
Difference = 14.1% - 9.3% = 4.8%