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1. You have chosen biology as your college major because youwould like to be a medical doctor. However, you find that theprobability of being accepted to medical school is about 20percent. If you are accepted to medical school, then your startingsalary when you graduate will be $320,000 per year. However, if youare not accepted, then you would choose to work in a zoo, where youwill earn $46,000 per year. Without considering the additionalyears you would spend in school if you study medicine or the timevalue of money.

- Expected starting salary:

-Standard deviation:

2. Stocks A, B, and C have expected returns of 14 percent, 14percent, and 10 percent, respectively, while their standarddeviations are 49 percent, 21 percent, and 21 percent,respectively. If you were considering the purchase of each of thesestocks as the only holding in your portfolio and the risk-free rateis 0 percent, which stock should you choose?

Coefficient of variation for stock

-A:

-B:

-C:

3. David invested $1,000 in large U.S. stocks at the beginningof 2012. This investment earned 15.30 percent in 2012, 31.50percent in 2013, 13.50 percent in 2014, and 2.30 percent in 2015.What return did he earn in the average year during the 2012–2015period?

-Returned earned in the average year: %

4. Michael invested $1,000 in large U.S. stocks at the beginningof 2012. This investment earned 17.35 percent in 2012, 30.95percent in 2013, 11.45 percent in 2014, and 1.60 percent in 2015.What was the average annual return that Michael earned over the2012–2015 period.

-Average annual return earned3

5.Assume the expected return on the market is 10 percent and therisk-free rate is 4 percent, What is the expected return for astock with a beta equal to 2.00? What is the market riskpremium?

-Expected return:

-market risk premium:

6.Linda is considering investing in a company's stock and isaware that the return on that investment is particularly sensitiveto how the economy is performing. Her analysis suggests that fourstates of the economy can affect the return on theinvestment.

		Probability		Return
Boom		0.4		25.00%
Good		0.2		15.00%
Level		0.2		10.00%
Slump		0.2		-5.00%

-expected return on Linda’s investment:

- determine the standard deviation of the return on Linda'sinvestment: