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Problem 6-9: You don't need to try to find a formula in the book; this is a problem of logic and proportion. You are given
- Problem 6-9: You don't need to try to find a formula in the book; this is a problem of logic and proportion. You are given three beta numbers. First set up an algebraic equation to determine the beta of the larger portion of the old portfolio (excluding the $5,000 portion sold at beta of 0.8); you will need to include the data on the sale of the $5,000 investment. Second, once you know the beta on the larger segment of the portfolio, you can calculate that weighted element and add the weighted element of the new stock with beta of 1.6. The result should be 1.25. You need to show the math.
Quantitative solutions can be used to check your work. But, you are expected to develop and show Excel formulas for these solutions. The path to the solution is where you will be evaluated. It is not acceptable to simply copy the answers.
(6-8) Required Rate of Return As an equity analyst you are concerned with what will happen to the required return for Universal Toddler's stock as market conditions change. Suppose IRF = 5%, IM = 12%, and BUT = 1.4. a. Under current conditions, what is run, the required rate of return on UT stock? Answer + r = 14.8% b. Now suppose TRF (1) increases to 6% or (2) decreases to 4% The market risk premium, RPM, (i.e. the slope of the SML) remains constant. How would this affect r and IUI? Answer + (1) r = 13 I) = 15.8%. (2) = 11% 1) = 13.8% c. Now assume TRP remains at 5% but mm (1) increases to 14% or (2) falls to 11% The market risk premium, RP, i.e. the slope of the SML) does not remain constant. How would these changes affect ryt? (6-9) Portfolio Beta Your retirement fund consists of a $5,000 investment in each of 15 different common stocks. The portfolio's beta is 1.20. Suppose you sell one of the stocks with a beta of 0.8 for $5,000 and use the proceeds to buy another stock whose beta is 1.6. Calculate your portfolio's new beta. Answer + ON = 1.25
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