Question

Part One:

You are given the following information for Wine and Cork Enterprises (WCE):

r_RF = 5%; r_M = 9%; RP_M = 4%, and beta = 1.4

What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

If inflation increases by 3% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places.

%

Assume now that there is no change in inflation, but risk aversion increases by 2%. What is WCE's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places.

%

If inflation increases by 3% and risk aversion increases by 2%, what is WCE's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places.

%

Part Two:

Stocks A and B have the following historical returns:

Year	Stock A's Returns, rA		Stock B's Returns, rB
2014	(22.20	%)	(13.30	%)
2015	28.25		28.80
2016	13.25		35.80
2017	(4.25	)	(7.70	)
2018	22.50		-6.05

1. Calculate the average rate of return for each stock during the period 2014 through 2018. Round your answers to two decimal places.

   Stock A: %

   Stock B: %

2. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been each year? Round your answers to two decimal places. Negative values should be indicated by a minus sign.

   Year	Portfolio
   2014	%
   2015	%
   2016	%
   2017	%
   2018	%

   What would the average return on the portfolio have been during this period? Round your answer to two decimal places.

   %

3. Calculate the standard deviation of returns for each stock and for the portfolio. Round your answers to two decimal places.

   	Stock A	Stock B	Portfolio
   Standard Deviation	%	%	%

4. Calculate the coefficient of variation for each stock and for the portfolio. Round your answers to two decimal places.

   	Stock A	Stock B	Portfolio
   CV

5. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio?

   -Select-Stock AStock BPortfolio

Answer 1

Part one

Risk free rate = 5%

Market return = 9%

Market Risk premium = 4%

Beta = 1.4

Rate of return = Risk free rate + ( Market risk premium * Beta )

= 5% + ( 4% * 1.4 )

= 10.6%

If inflation increases by 3% but there is no change in investors' risk aversion

In the given case risk free rate increase from 5% to 8% but risk premium remain same.

Rate of return = 8% + ( 4% * 1.4 )

= 13.6%

If there is no change in inflation, but risk aversion increases by 2%​​​​​​​

In the given case market risk premium increase from 4% to 6% but risk free return remain same.

Rate of return = 5% + ( 6% * 1.4 )

= 13.4%

If inflation increases by 3% and risk aversion increases by 2%,​​​​​​​

In that case

Risk free return will be ( 5% + 3%) = 8%

Market risk premium = ( 4% + 2% ) = 6%

Rate of return = 8% + ( 6% * 1.4 )

= 16.4%