Question
Q1. Suppose rRF = 9%, market returns = 14%, and bi = 1.3. a. What is ri, the required rate of return on Stock i?
Q1. Suppose rRF = 9%, market returns = 14%, and bi = 1.3.
a. What is ri, the required rate of return on Stock i?
b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect risk premium and ri?
c. Now assume rRF remains at 9% but market returns (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?
Q2.
a) MoviePart's bonds have 9 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?
b) Assume that the risk-free rate is 5% and that the market risk premium is 6%. What is the required return on the market, on a stock with a beta of 1.0, and on a stock with a beta of 1.2?
c) Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?
Q3.
- One of your friend has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio's beta?
- Imagine that you have portfolio of a $7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.09. Now, suppose you sell one of the stocks with a beta of 1.0 for $8,500 and use the proceeds to buy another stock whose beta is 1.05. Calculate your portfolio's new beta.
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