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You are creating a portfolio of the following stocks and Treasury bond. Company Beta Costco 0.66 Microsoft 0.83 safeway 1.66 Walmart 0.42 Fred Meyer 1.20
| You are creating a portfolio of the following stocks and Treasury bond. | |||
| Company | Beta | ||
| Costco | 0.66 | ||
| Microsoft | 0.83 | ||
| safeway | 1.66 | ||
| Walmart | 0.42 | ||
| Fred Meyer | 1.20 | ||
| Risk free security | 0 | ||
| a. If you create an equally weighted portfolio (1/6 in each security), what is the beta of your portfolio? | |||
| Portfoio a Beta (equal weights)? | |||
| b. Another strategy is to have different weights on less stocks. | |||
| If you invest 25% in Costco, 35% in Safeway and 40% in Fred Meyer, what is the portfolio beta? | |||
| Company | Beta | weight | |
| Costco | 0.66 | 25% | |
| safeway | 1.66 | 35% | |
| Fred Meyer | 1.20 | 40% | |
| Portfolio b beta? | |||
| c. Estimates of the risk free rate and market risk premiums are below. | |||
| risk free rate | 1.80% | Market risk premium* | 6% |
| 4 a. Using information above, what are the required returns for all stocks and portfolios? | |||
| Company | Beta | required return according to CAPM | |
| Costco | 0.66 | ||
| Microsoft | 0.83 | ||
| Safeway | 1.66 | ||
| Target | 0.42 | ||
| Fred Meyer | 1.20 | ||
| Risk free security | 0 | ||
| Portfolio a (beta in a) | |||
| Portfolio b (beta in b) | |||
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