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+ 2 e. The risk-free rate on long-term Treasury bonds is 6.06%. Assume that the market risk premium is 3 5.01%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. 5 Market risk premium (AP) = 5.010% - Risk-free rate 6.060% 3 2 Expected return on market Risk-free rate Market risk premium 3 6.060% 5.010% 1 11.070% 2 3. Required return Risk-free rate + Market Risk Premiun Beta 4 5 Grosman: Required return 6.060% 5.010% 1459 13.369% 3 3 Landow: Required return 6.060% 5.010% -0,553 3.289% X Grosman's stock is 1459 times as risky as the average return Landow's stock has a low expected return, but it will pay off if the market declines. F. If you formed a portfolio that consisted of 60% Grosman stock and 40% Landow stock, what would be its beta and its required return? a The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta 1 would be: 2 3 Portfolio beta = 0.45 g. Suppose an investor wants to include Grosman Industries' stock in his or her portfolio. Stocks A, B. and C are currently in the portfolio, and their betas are 0.739.0.905, and 1.523, respectively. Calculate the new portfolio's required return if it consists of 35% of Grosman, 15% of Stock A, 30% of Stock B, and 20% of Stock C. ) 1 3 44 5 Goodman Stock A Stock B Stock C Bela 1.459 0.739 0.905 1.523 Portfolio Weight 35% 15% 30% 20% 100% Portfolio Bela = 1.198 7 3 Required return on portfolio: = * Beta 11.1 Risk-free rate 6.06% 12.06% + Market Risk Premiun 5.01% ) 1 2 1.198 + 2 e. The risk-free rate on long-term Treasury bonds is 6.06%. Assume that the market risk premium is 3 5.01%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns. 5 Market risk premium (AP) = 5.010% - Risk-free rate 6.060% 3 2 Expected return on market Risk-free rate Market risk premium 3 6.060% 5.010% 1 11.070% 2 3. Required return Risk-free rate + Market Risk Premiun Beta 4 5 Grosman: Required return 6.060% 5.010% 1459 13.369% 3 3 Landow: Required return 6.060% 5.010% -0,553 3.289% X Grosman's stock is 1459 times as risky as the average return Landow's stock has a low expected return, but it will pay off if the market declines. F. If you formed a portfolio that consisted of 60% Grosman stock and 40% Landow stock, what would be its beta and its required return? a The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta 1 would be: 2 3 Portfolio beta = 0.45 g. Suppose an investor wants to include Grosman Industries' stock in his or her portfolio. Stocks A, B. and C are currently in the portfolio, and their betas are 0.739.0.905, and 1.523, respectively. Calculate the new portfolio's required return if it consists of 35% of Grosman, 15% of Stock A, 30% of Stock B, and 20% of Stock C. ) 1 3 44 5 Goodman Stock A Stock B Stock C Bela 1.459 0.739 0.905 1.523 Portfolio Weight 35% 15% 30% 20% 100% Portfolio Bela = 1.198 7 3 Required return on portfolio: = * Beta 11.1 Risk-free rate 6.06% 12.06% + Market Risk Premiun 5.01% ) 1 2 1.198