Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Q No.2 a)The following table shows betas for several companies. Calculate each stock's expected rate of return using CAPM. Assume the risk free rate of

Q No.2 a)The following table shows betas for several companies. Calculate each stock's expected rate of return using CAPM. Assume the risk free rate of interest is 9 percent. Use a 6 Percent risk premium for the market portfolio. Company Beta MICRO 2.5 Citi 1.75 Pfizer 0.5 Amazon 0.74 b)If the expected rate of return on the market portfolio is 16 percent and T- bills yield is 11 percent, what must be the beta of a stock that investors expect to return 12 percent? c)If the expected rate of return on the market portfolio is 16 percent and T- bills yield is 11 percent, what must be the beta of a stock that investors expect to return 19 percent? d)Why b and c part above given different expected rate of return, justify you answer with reason. e)You have equal investment in all four stocks given in part (b) of this question. What would be your portfolio beta? f)Suppose you have investment as follows: Cisco 20% CitiGroup 20% Merck 30% Walt Disney 30% Calculate your portfolio beta. Why beta is changing, compare your answer with e part above and justify reason of change in BETA.

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

Investments An Introduction

Authors: Herbert B Mayo

9th Edition

324561385, 978-0324561388

More Books

Students also viewed these Finance questions

Question

What is a make-or-buy decision?

Answered: 1 week ago

Question

40. Consider a M/G/1 system with E[S] Answered: 1 week ago

Answered: 1 week ago