Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1) You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk

1) You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills? (Hint: w1 +w2 = 100%)

(Formula: Portfolio beta = w1 * beta 1 + w2 *beta 2)

2) You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta? (Formula: Portfolio beta = w1 * beta 1 + w2 *beta 2 + w3*beta 3)

3) According to CAPM, which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Stock Beta Expected Realized Return

A .85 9.2%

B 1.08 11.8%

C 1.69 15.3%

D .71 7.8%

E 1.45 12.3%

4)You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $30. The stock's beta is 1.3, rf is 6%, and market risk premium is 10%. What is the stock's alpha?

** Show work using formulas and calculation (not excel), show all steps**

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cases In Financial Management

Authors: I.M. Pandey

3rd Edition

0071333428, 978-0071333429

More Books

Students also viewed these Finance questions

Question

Different types of Grading?

Answered: 1 week ago

Question

Explain the functions of financial management.

Answered: 1 week ago

Question

HOW MANY TOTAL WORLD WAR?

Answered: 1 week ago

Question

Discuss the scope of financial management.

Answered: 1 week ago