Question 13

equll portfolio beta be? c. if you wanted to reduce your portfolio beta, how might you change the b. If this portfolio contained weightings of the stocks? d. If you reduce the beta of your portfolio, would you expect the return to rise or fall? 12. Portfolio Beta A diversified stock portfolio contains equal amounts of the following stocks: STOCK BETA MTV GM ITT AT&T GE 0.9 a. What is the portfolio beta? b. If you wanted to increase the risk of this portfolio, what might you do? c. Why might you want to increase the risk of your portfolio? 13. Using CAPM to Calculate Required Return Use the capital asset pricing model (CAPM) to find required rates of return on the five stocks in Problem 12, given that the risk-free return is 4% and market risk premium is 7%. 14. Required vs. Expected Return a. The risk-free rate is 6% and the market risk premium is 7%. If a stock with a beta of 1.3 had an expected return of 17%, would you be more likely to buy or sell this stock? Explain. b. If the stock in part (a) had an expected return of 15%, would you be more likely to buy or sell this stock? Explain. 15. Required Return and Stock Value The risk-free rate is 4%, and the expected return on the market is 11%. Key West Industries stock has a beta of 0.85. It expects to pay a $2.40 dividend, and the dividend is expected to grow at a rate of 4% annually. a. What is the required return on this stock? b. What should the market price of the stock be, in a competitive market? 16. Required Return and Stock Value The risk-free rate is 4%, and the expected return on the market is 13%. Marathon Industries stock has a beta of 1.1. It expects to pay a $3.30 divi- dend, and the dividend is expected to grow at a rate of 6% annually. a. What is the required return on this stock? b. Would you buy this stock at prices of $35, $40, and $45? 17. Required Return, Expected Return, and Stock Value American Rrewing C