Question
You have $20,000 to invest in a stock portfolio. Your choices are Stock A, which has a beta of 2, and Stock B, which has
You have $20,000 to invest in a stock portfolio. Your choices are Stock A, which has a beta of 2, and Stock B, which has a beta of 0.9. The risk-free rate is 3%, and the expected return on the market is 9%. If your goal is to create a portfolio that has an expected returnof 13.68%, how much money do you need to invest in Stocks A and B? Assume you expect a company's net income to remain stable at $1,200 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company's = 1.5, the market risk premium is 4% and the 20-30 year yield on risk-free treasury bonds is 2%. Finally, assume the company has 1,000 shares of common stock outstanding. Use the CAPM to estimate the company's equity cost of capital.
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