Q:-

For the following questions, assume:

• Risk free rate = 3%.
• Expected market return = 11%.
• Standard deviation of market returns = 15%.
• Stock A:
  • Standard deviation of returns = 20%.
  • Correlation between stock A returns and market returns = 0.77.
  • Shares outstanding = 10 million.
  • Current share price = $10.
• Stock B:
  • Standard deviation of stock B returns = 27.5%.
  • Correlation between stock B returns and market returns = 0.45.
  • Shares outstanding = 750,000.
  • Current share price = $45.

Q(a): Please compute the beta of each stock.

Q(b): Which stock has the highest systematic risk?

Q(c): What is the beta of a value weighted portfolio of stocks A and B? (Hint: value weighted refers to weighting by market capitalization).

Request: Please share your steps of solution with answers highlighted.