Problem 1. (30 points)
You buy ten shares of company ABC for $1200. The share pays no dividends but at the end
of one year you will sell the share for $1300. Calculate the return in money terms and in
percentage term (rate of return).
Problem 2. (40 points)
Historical data of the returns for Goodman and Landry is given in the table below.
2013 24.8% -1.0%
2012 -4.2% 13.2%
2011 62.7% -10.0%
2010 2.9% -0.4%
2009 60.9% 11.7%
a) Calculate the average return for both companies
b) Calculate standard deviation using the historical data of the returns for Goodman
and Landry. Which one is more risky?
c) Suppose you invest 30% in Goodman and 70% in Landry, what will be the risk of your
Problem 3. (30 points)
Babua Company has a beta of 1.15. The risk-free rate is 3% and the expected return on the
market is 10%.
a) What is the required rate of return on the Company’s share?
b) What is the market risk premium?
c) What is the share risk premium?