CHAPTER 13 RISK, RETURN, AND THE SECURITY MARKET LINE

Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. On the other hand, there are some risks that affect all investments. This portion of the total risk of an asset cannot be costlessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in e pected returns. If the market e pected the growth rate in the coming year to be ! percent, then there would be no change in security prices if this e pectation had been fully anticipated and priced. "owever, if the market had been e pecting a growth rate other than ! percent and the e pectation was incorporated into security prices, then the government#s announcement would most likely cause security prices in general to change$ prices would drop if the anticipated growth rate had been more than ! percent, and prices would rise if the anticipated growth rate had been less than ! percent. a. b. c. d. e. f. a. b. c. d. e. systematic unsystematic both$ probably mostly systematic unsystematic unsystematic systematic a change in systematic risk has occurred$ market prices in general will most likely decline. no change in unsystematic risk$ company price will most likely stay constant. no change in systematic risk$ market prices in general will most likely stay constant. a change in unsystematic risk has occurred$ company price will most likely decline. no change in systematic risk$ market prices in general will most likely stay constant.

2.

3.

4.

5. 6. .

%o to both questions. The portfolio e pected return is a weighted average of the asset returns, so it must be less than the largest asset return and greater than the smallest asset return. &alse. The variance of the individual assets is a measure of the total risk. The variance on a well' diversified portfolio is a function of systematic risk only. (es, the standard deviation can be less than that of every asset in the portfolio. "owever, p cannot be less than the smallest beta because p is a weighted average of the individual asset betas. (es. It is possible, in theory, to construct a )ero beta portfolio of risky assets whose return would be equal to the risk'free rate. It is also possible to have a negative beta$ the return would be less than the risk'free rate. * negative beta asset would carry a negative risk premium because of its value as a diversification instrument.

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Such layoffs generally occur in the conte t of corporate restructurings. To the e tent that the market views a restructuring as value'creating, stock prices will rise. So, it#s not layoffs per se that are being cheered on. %onetheless, +all Street does encourage corporations to takes actions to create value, even if such actions involve layoffs.

1#. ,arnings contain information about recent sales and costs. This information is useful for pro-ecting future growth rates and cash flows. Thus, une pectedly low earnings often lead market participants to reduce estimates of future growth rates and cash flows$ price drops are the result. The reverse is often true for une pectedly high earnings. $olutions to Questions and %ro&le's NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. ue to space and readability constraints! when these intermediate steps are included in this solutions manual! rounding may appear to have occurred. "owever! the final answer for each problem is found without rounding during any step in the problem. #asic 1. The portfolio weight of an asset is total investment in that asset divided by the total portfolio value. &irst, we will find the portfolio value, which is. Total value / 01234567 8 05234!97 / 400,112 The portfolio weight for each stock is. +eight* / 01234567:400,112 / .;101 +eightB / 05234!97:400,112 / .<01! 2. The e pected return of a portfolio is the sum of the weight of each asset times the e pected return of each asset. The total value of the portfolio is. Total value / 4!,=62 8 <,922 / 4;,;62 So, the e pected return of this portfolio is. ,3>p7 / 34!,=62:4;,;62732.007 8 34<,922:4;,;62732.067 / .0<!< or 0<.!<? 3. The e pected return of a portfolio is the sum of the weight of each asset times the e pected return of each asset. So, the e pected return of the portfolio is. ,3>p7 / .;23.2=7 8 .!63.097 8 .063.0<7 / .00;2 or 00.;2?

4.

"ere we are given the e pected return of the portfolio and the e pected return of each asset in the portfolio, and are asked to find the weight of each asset. +e can use the equation for the e pected return of a portfolio to solve this problem. Since the total weight of a portfolio must equal 0 3022?7, the weight of Stock ( must be one minus the weight of Stock @. Aathematically speaking, this means. ,3>p7 / .0!5 / .05w@ 8 .02630 B w@7 +e can now solve this equation for the weight of Stock @ as. .0!5 / .05w@ 8 .026 B .026w@ .20= / .2<6w@ w@ / 2.65!169 So, the dollar amount invested in Stock @ is the weight of Stock @ times the total portfolio value, or. Investment in @ / 2.65!1693402,2227 / 46,5!1.69 *nd the dollar amount invested in Stock ( is. Investment in ( / 30 B 2.65!16973402,2227 / 45,695.5<

5.

The e pected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring. So, the e pected return of the asset is. ,3>7 / .!63B.217 8 .963.!07 / .0<96 or 0<.96?

6.

The e pected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring. So, the e pected return of the asset is. ,3>7 / .!23B.267 8 .623.0!7 8 .<23.!67 / .0!62 or 0!.62?

The e pected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring. So, the e pected return of each stock asset is. ,3>*7 / .063.267 8 .;63.217 8 .!23.0<7 / .2166 or 1.66? ,3>B7 / .063B.097 8 .;63.0!7 8 .!23.!=7 / .0026 or 00.26? To calculate the standard deviation, we first need to calculate the variance. To find the variance, we find the squared deviations from the e pected return. +e then multiply each possible squared deviation by its probability, then add all of these up. The result is the variance. So, the variance and standard deviation of each stock is. *! /.063.26 B .21667! 8 .;63.21 B .21667! 8 .!23.0< B .21667! / .222;2 * / 3.222;270:! / .2!5; or !.5;?

B! /.063B.09 B .00267! 8 .;63.0! B .00267! 8 .!23.!= B .00267! / .201<2 B / 3.201<270:! / .0<6< or 0<.6<? !. The e pected return of a portfolio is the sum of the weight of each asset times the e pected return of each asset. So, the e pected return of the portfolio is. ,3>p7 / .!63.217 8 .663.067 8 .!23.!57 / .0626 or 06.26? If we own this portfolio, we would e pect to get a return of 06.26 percent. ". a. To find the e pected return of the portfolio, we need to find the return of the portfolio in each state of the economy. This portfolio is a special case since all three assets have the same weight. To find the e pected return in an equally weighted portfolio, we can sum the returns of each asset and divide by the number of assets, so the e pected return of the portfolio in each state of the economy is. Boom. Bust. ,3>p7 / 3.29 8 .06 8 .<<7:< / .01<< or 01.<<? ,3>p7 / 3.0< 8 .2< .2;7:< / .2<<< or <.<<?

To find the e pected return of the portfolio, we multiply the return in each state of the economy by the probability of that state occurring, and then sum. Coing this, we find. ,3>p7 / .<63.01<<7 8 .;63.2<<<7 / .2161 or 1.61? b. This portfolio does not have an equal weight in each asset. +e still need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Coing so, we get. Boom. Bust. ,3>p7 / .!23.297 8.!23.067 8 .;23.<<7 /.!5!2 or !5.!2? ,3>p7 / .!23.0<7 8.!23.2<7 8 .;23.2;7 / B.2252 or B2.52?

*nd the e pected return of the portfolio is. ,3>p7 / .<63.!5!27 8 .;63.2257 / .21!0 or 1.!0? To find the variance, we find the squared deviations from the e pected return. +e then multiply each possible squared deviation by its probability, than add all of these up. The result is the variance. So, the variance and standard deviation of the portfolio is. p! / .<63.!5!2 B .21!07! 8 .;63.2252 B .21!07! / .20<9;9

1#.

a. This portfolio does not have an equal weight in each asset. +e first need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Coing so, we get. Boom. Dood. Eoor. Bust. ,3>p7 / .<23.<7 8 .523.567 8 .<23.<<7 / .<;=2 or <;.=2? ,3>p7 / .<23.0!7 8 .523.027 8 .<23.067 / .0!02 or 0!.02? ,3>p7 / .<23.207 8 .523B.067 8 .<23B.267 / B.29!2 or B9.!2? ,3>p7 / .<23B.2;7 8 .523B.<27 8 .<23B.2=7 / B.0;62 or B0;.62?

*nd the e pected return of the portfolio is. ,3>p7 / .063.<;=27 8 .563.0!027 8 .<63B.29!27 8 .263B.0;627 / .29;5 or 9.;5? b. To calculate the standard deviation, we first need to calculate the variance. To find the variance, we find the squared deviations from the e pected return. +e then multiply each possible squared deviation by its probability, than add all of these up. The result is the variance. So, the variance and standard deviation of the portfolio is. p! / .063.<;=2 B .29;57! 8 .563.0!02 B .29;57! 8 .<63B.29!2 B .29;57! 8 .263B.0;62 B . 29;57! p! / .2!5<; p / 3.2!5<;70:! / .06;0 or 06.;0? 11. The beta of a portfolio is the sum of the weight of each asset times the beta of each asset. So, the beta of the portfolio is. p / .!63.157 8 .!230.097 8 .0630.007 8 .5230.<;7 / 0.06 12. The beta of a portfolio is the sum of the weight of each asset times the beta of each asset. If the portfolio is as risky as the market it must have the same beta as the market. Since the beta of the market is one, we know the beta of our portfolio is one. +e also need to remember that the beta of the risk'free asset is )ero. It has to be )ero since the asset has no risk. Setting up the equation for the beta of our portfolio, we get. p / 0.2 / 0:<327 8 0:<30.<17 8 0:<3@7 Solving for the beta of Stock @, we get. @ / 0.;!

13. F*EA states the relationship between the risk of an asset and its e pected return. F*EA is. ,3>i7 / >f 8 G,3>A7 B >fH I i Substituting the values we are given, we find. ,3>i7 / .26! 8 3.00 B .26!730.267 / .00!= or 00.!=? 14. +e are given the values for the F*EA e cept for the of the stock. +e need to substitute these values into the F*EA, and solve for the of the stock. One important thing we need to reali)e is that we are given the market risk premium. The market risk premium is the e pected return of the market minus the risk'free rate. +e must be careful not to use this value as the e pected return of the market. Jsing the F*EA, we find. ,3>i7 / .02! / .2568 .216i i / 2.;9 15. "ere we need to find the e pected return of the market using the F*EA. Substituting the values given, and solving for the e pected return of the market, we find. ,3>i7 / .0<6 / .266 8 G,3>A7 B .266H30.097 ,3>A7 / .0!<5 or 0!.<5? 16. "ere we need to find the risk'free rate using the F*EA. Substituting the values given, and solving for the risk'free rate, we find. ,3>i7 / .05 / >f 8 3.006 B >f730.567 .05 / >f 8 .0;;96 B 0.56>f >f / .26=5 or 6.=5? 1 . a. *gain we have a special case where the portfolio is equally weighted, so we can sum the returns of each asset and divide by the number of assets. The e pected return of the portfolio is. ,3>p7 / 3.0; 8 .2517:! / .0252 or 02.52?

b. +e need to find the portfolio weights that result in a portfolio with a of 2.=6. +e know the of the risk'free asset is )ero. +e also know the weight of the risk'free asset is one minus the weight of the stock since the portfolio weights must sum to one, or 022 percent. So. p / 2.=6 / wS30.<67 8 30 B wS7327 2.=6 / 0.<6wS 8 2 B 2wS wS / 2.=6:0.<6 wS / .92<9 *nd, the weight of the risk'free asset is. w>f / 0 B .92<9 / .!=;< c. +e need to find the portfolio weights that result in a portfolio with an e pected return of 1 percent. +e also know the weight of the risk'free asset is one minus the weight of the stock since the portfolio weights must sum to one, or 022 percent. So. ,3>p7 / .21 / .0;wS 8 .25130 B wS7 .21 / .0;wS 8 .251 B .251wS .2<! / .00!wS wS / .!169 So, the of the portfolio will be. p / .!16930.<67 8 30 B .!1697327 / 2.<1; d. Solving for the of the portfolio as we did in part a, we find. p / !.92 / wS30.<67 8 30 B wS7327 wS / !.92:0.<6 / ! w>f / 0 B ! / B0 The portfolio is invested !22? in the stock and B022? in the risk'free asset. This represents borrowing at the risk'free rate to buy more of the stock. 1!. &irst, we need to find the of the portfolio. The of the risk'free asset is )ero, and the weight of the risk'free asset is one minus the weight of the stock, the of the portfolio is. Kp / w+30.!67 8 30 B w+7327 / 0.!6w+ So, to find the of the portfolio for any weight of the stock, we simply multiply the weight of the stock times its .

,ven though we are solving for the and e pected return of a portfolio of one stock and the risk'free asset for different portfolio weights, we are really solving for the SAL. *ny combination of this stock, and the risk'free asset will fall on the SAL. &or that matter, a portfolio of any stock and the risk'free asset, or any portfolio of stocks, will fall on the SAL. +e know the slope of the SAL line is the market risk premium, so using the F*EA and the information concerning this stock, the market risk premium is. ,3>+7 / .06! / .26< 8 A>E30.!67 A>E / .2==:0.!6 / .29=! or 9.=!? So, now we know the F*EA equation for any stock is. ,3>p7 / .26< 8 .29=<p The slope of the SAL is equal to the market risk premium, which is 2.29=!. Jsing these equations to fill in the table, we get the following results. w+ 2.22? !6.22? 62.22? 96.22? 022.22? 0!6.22? 062.22? ,3>p7 6.<2? 9.91? 02.!6? 0!.9<? 06.!2? 09.;1? !2.06? Kp 2.222 2.<0< 2.;!6 2.=<1 0.!62 0.6;< 0.196

1". There are two ways to correctly answer this question. +e will work through both. &irst, we can use the F*EA. Substituting in the value we are given for each stock, we find. ,3>(7 / .21 8 .29630.<27 / .0996 or 09.96? It is given in the problem that the e pected return of Stock ( is 01.6 percent, but according to the F*EA, the return of the stock based on its level of risk, the e pected return should be 09.96 percent. This means the stock return is too high, given its level of risk. Stock ( plots above the SAL and is undervalued. In other words, its price must increase to reduce the e pected return to 09.96 percent. &or Stock M, we find. ,3>M7 / .21 8 .29632.927 / .0<!6 or 0<.!6? The return given for Stock M is 0!.0 percent, but according to the F*EA the e pected return of the stock should be 0<.!6 percent based on its level of risk. Stock M plots below the SAL and is overvalued. In other words, its price must decrease to increase the e pected return to 0<.!6 percent.

+e can also answer this question using the reward'to'risk ratio. *ll assets must have the same reward'to'risk ratio. The reward'to'risk ratio is the risk premium of the asset divided by its . +e are given the market risk premium, and we know the of the market is one, so the reward'to'risk ratio for the market is 2.296, or 9.6 percent. Falculating the reward'to'risk ratio for Stock (, we find. >eward'to'risk ratio ( / 3.016 B .217 : 0.<2 / .2121 The reward'to'risk ratio for Stock ( is too high, which means the stock plots above the SAL, and the stock is undervalued. Its price must increase until its reward'to'risk ratio is equal to the market reward'to'risk ratio. &or Stock M, we find. >eward'to'risk ratio M / 3.0!0 B .217 : .92 / .261; The reward'to'risk ratio for Stock M is too low, which means the stock plots below the SAL, and the stock is overvalued. Its price must decrease until its reward'to'risk ratio is equal to the market reward'to'risk ratio. 2#. +e need to set the reward'to'risk ratios of the two assets equal to each other, which is. 3.016 B >f7:0.<2 / 3.0!0 B >f7:2.92 +e can cross multiply to get. 2.923.016 B >f7 / 0.<23.0!0 B >f7 Solving for the risk'free rate, we find. 2.0!=6 B 2.92>f / 2.069< B 0.<2>f >f / .25;< or 5.;<? $ntermediate 21. &or a portfolio that is equally invested in large'company stocks and long'term bonds. >eturn / 30!.<2? 8 6.12?7:! / =.26? &or a portfolio that is equally invested in small stocks and Treasury bills. >eturn / 309.02? 8 <.12?7:! / 02.56?

22. +e know that the reward'to'risk ratios for all assets must be equal. This can be e pressed as. G,3>*7 B >fH:* / G,3>B7 B >fH:KB The numerator of each equation is the risk premium of the asset, so. >E*:* / >EB:B +e can rearrange this equation to get. B:* / >EB:>E* If the reward'to'risk ratios are the same, the ratio of the betas of the assets is equal to the ratio of the risk premiums of the assets. 23. a. +e need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Coing so, we get. Boom. %ormal. Bust. ,3>p7 / .53.!57 8 .53.<;7 8 .!3.667 / .<622 or <6.22? ,3>p7 / .53.097 8 .53.0<7 8 .!3.2=7 / .0<12 or 0<.12? ,3>p7 / .53.227 8 .53B.!17 8 .!3B.567 / B.!2!2 or B!2.!2?

*nd the e pected return of the portfolio is. ,3>p7 / .<63.<67 8 .623.0<17 8 .063B.!2!7 / .0;0! or 0;.0!? To calculate the standard deviation, we first need to calculate the variance. To find the variance, we find the squared deviations from the e pected return. +e then multiply each possible squared deviation by its probability, than add all of these up. The result is the variance. So, the variance and standard deviation of the portfolio is. !p / .<63.<6 B .0;0!7! 8 .623.0<1 B .0;0!7! 8 .063B.!2! B .0;0!7! !p / .2<!6< p / 3.2<!6<70:! / .0125 or 01.25? b. The risk premium is the return of a risky asset, minus the risk'free rate. T'bills are often used as the risk'free rate, so. >Ei / ,3>p7 B >f / .0;0! B .2<12 / .0!<! or 0!.<!?

c. The appro imate e pected real return is the e pected nominal return minus the inflation rate, so. *ppro imate e pected real return / .0;0! B .2<6 / .0!;! or 0!.;!? To find the e act real return, we will use the &isher equation. Coing so, we get. 0 8 ,3>i7 / 30 8 h7G0 8 e3ri7H 0.0;0! / 30.2<627G0 8 e3ri7H e3ri7 / 30.0;0!:0.2<67 B 0 / .0!0= or 0!.0=? The appro imate real risk premium is the e pected return minus the risk'free rate, so. *ppro imate e pected real risk premium / .0;0! B .2<1 / .0!<! or 0!.<!? The e act e pected real risk premium is the appro imate e pected real risk premium, divided by one plus the inflation rate, so. , act e pected real risk premium / .00;1:0.2<6 / .00=2 or 00.=2? 24. Since the portfolio is as risky as the market, the of the portfolio must be equal to one. +e also know the of the risk'free asset is )ero. +e can use the equation for the of a portfolio to find the weight of the third stock. Coing so, we find. p / 0.2 / w*3.167 8 wB30.!27 8 wF30.<67 8 w>f327 Solving for the weight of Stock F, we find. wF / .<!5295 So, the dollar investment in Stock F must be. Invest in Stock F / .<!5295340,222,2227 / 4<!5,295.29 +e know the total portfolio value and the investment of two stocks in the portfolio, so we can find the weight of these two stocks. The weights of Stock * and Stock B are. w* / 4!02,222 : 40,222,222 / .!02 wB / 4<!2,222:40,222,222 / .<!2

+e also know the total portfolio weight must be one, so the weight of the risk'free asset must be one minus the asset weight we know, or. 0 / w* 8 wB 8 wF 8 w>f / 0 B .!02 B .<!2 B .<!5295 B w>f w>f / .056=!; So, the dollar investment in the risk'free asset must be. Invest in risk'free asset / .056=!;340,222,2227 / 4056,=!6.=< %hallenge 25. +e are given the e pected return of the assets in the portfolio. +e also know the sum of the weights of each asset must be equal to one. Jsing this relationship, we can e press the e pected return of the portfolio as. ,3>p7 / .016 / [email protected]!7 8 w(3.0<;7 .016 / [email protected]!7 8 30 B [email protected]<;7 .016 / .09!w@ 8 .0<; B .0<;w@ .25= / .2<;w@ w@ / 0.<;000 *nd the weight of Stock ( is. w( / 0 B 0.<;000 w( / B.<;000 The amount to invest in Stock ( is. Investment in Stock ( / B.<;00034022,2227 Investment in Stock ( / B4<;,000.00 * negative portfolio weight means that you short sell the stock. If you are not familiar with short selling, it means you borrow a stock today and sell it. (ou must then purchase the stock at a later date to repay the borrowed stock. If you short sell a stock, you make a profit if the stock decreases in value. To find the beta of the portfolio, we can multiply the portfolio weight of each asset times its beta and sum. So, the beta of the portfolio is. E / 0.<;00030.527 8 3B.<;000732.=67 E / 0.6; .

26. The amount of systematic risk is measured by the of an asset. Since we know the market risk premium and the risk'free rate, if we know the e pected return of the asset we can use the F*EA to solve for the of the asset. The e pected return of Stock I is. ,3>I7 / .!63.007 8 .623.!=7 8 .!63.0<7 / .!262 or !2.62? Jsing the F*EA to find the of Stock I, we find. .!262 / .25 8 .21I I / !.2; The total risk of the asset is measured by its standard deviation, so we need to calculate the standard deviation of Stock I. Beginning with the calculation of the stock#s variance, we find.
I! / .!63.00 B .!2627! 8 .623.!= B .!2627! 8 .!63.0< B .!2627! I! / .229!1 I / 3.229!170:! / .216< or 1.6<?

Jsing the same procedure for Stock II, we find the e pected return to be. ,3>II7 / .!63B.527 8 .623.027 8 .!63.6;7 / .2=22 Jsing the F*EA to find the of Stock II, we find. .2=22 / .25 8 .21II II / 2.;< *nd the standard deviation of Stock II is. II! / .!63B.52 B .2=227! 8 .623.02 B .2=227! 8 .!63.6; B .2=227! II! / .006<2 II / 3.006<270:! / .<<=; or <<.=;? *lthough Stock II has more total risk than I, it has much less systematic risk, since its beta is much smaller than I#s. Thus, I has more systematic risk, and II has more unsystematic and more total risk. Since unsystematic risk can be diversified away, I is actually the NriskierO stock despite the lack of volatility in its returns. Stock I will have a higher risk premium and a greater e pected return.

2 . "ere we have the e pected return and beta for two assets. +e can e press the returns of the two assets using F*EA. If the F*EA is true, then the security market line holds as well, which means all assets have the same risk premium. Setting the risk premiums of the assets equal to each other and solving for the risk'free rate, we find. 3.0<! B >f7:0.<6 / 3.020 B >f7:.12 .123.0<! B >f7 / 0.<63.020 B >f7 .026; B .1>f / .0<;<6 B 0.<6>f .66>f / .2<296 >f / .266= or 6.6=? %ow using F*EA to find the e pected return on the market with both stocks, we find. .0<! / .266= 8 0.<63>A B .266=7 >A / .00!< or 00.!<? 2!. .020 / .266= 8 .123>A B .266=7 >A / .00!< or 00.!<?

a. The e pected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring. So, the e pected return of each stock is. ,3>*7 / .063B.217 8 .923.0<7 8 .063.517 / .0602 or 06.02? ,3>B7 / .063B.267 8 .923.057 8 .063.!=7 / .0<52 or 0<.52? b. +e can use the e pected returns we calculated to find the slope of the Security Aarket Line. +e know that the beta of Stock * is .!6 greater than the beta of Stock B. Therefore, as beta increases by .!6, the e pected return on a security increases by .209 3/ .0602 B .0<527. The slope of the security market line 3SAL7 equals.

SlopeSAL / >ise : >un SlopeSAL / Increase in e pected return : Increase in beta SlopeSAL / 3.0602 B .0<527 : .!6 SlopeSAL / .2;12 or ;.12?

Since the market#s beta is 0 and the risk'free rate has a beta of )ero, the slope of the Security Aarket Line equals the e pected market risk premium. So, the e pected market risk premium must be ;.1 percent. +e could also solve this problem using F*EA. The equations for the e pected returns of the two stocks are. ,3>*7 / .060 / >f 8 3B 8 .!673A>E7 ,3>B7 / .0<5 / >f 8 B3A>E7 +e can rewrite the F*EA equation for Stock * as. .060 / >f 8 B3A>E7 8 .!63A>E7 Subtracting the F*EA equation for Stock B from this equation yields. .209 / .!6A>E A>E / .2;1 or ;.1? which is the same answer as our previous