Can you help me understand how you came up with the value .09 from the answer below?

Solution

Hi, the question is not tricky, let me make the explanation clear for you

Question One

R=rf + b * (rm-rf) = rf + b * (RPm).

= .02+2*(.11-.02) = .2 = 20%

Beta is a measure of risk. The 2 you are talking of comes from the question where we are told the beta is 2 times the average stock. In this case, we assume it is 2 times of average stock let us say x.

Question Two

Step1..5*1.2+.5*2=1.6

Here, we are forming a portfolio, with halve of the weights from each stock. Half is 0.5.On the other hand, we are only considering the beta, the measure of risk. Beta is 2 on CBC therefore we are calculating its half. On the other hand, HCSC has a beta of 1.2,we calculate its half too.

Step2. .02+1.6*.09=.164

The question has directed you to use the values from the previous question, I guess number 9 on your case. Therefore, you use the rm and rf from it. There is no assumption.