# Expected Return and Beta Risk

17. The expected return on the market is 13% and the risk-free rate is 5%. Your portfolio has a beta of 1.3. What is the expected return on your portfolio?

18. What is the beta of the following portfolio?

40% Stock A Beta = 1.2

30% Stock B Beta = 1

30% Stock C Beta = 0.9

19. The more ________________________ the covariance of two assets, the greater the benefits of diversification.

20. The risk-free rate is 6% and the expected return on the market is 12%. Which of the following stocks is most undervalued?

Stock A Expected Return = 11% Beta = 1.5

Stock B Expected Return = 11% Beta = 0.5

21. You have taken a job with an arbitrage firm. An analyst has presented the following information to you.

Stock A Expected Return is 12%

Stock B Expected Return is 15%.

As arbitrage trader what action would you take?

25. Total Risk is comprised of ___________________ + _______________________.

26. ______________________________ can be largely diversified away.

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#### Solution Preview

17. The expected return on the market is 13% and the risk-free rate is 5%. Your portfolio has a beta of 1.3. What is the expected return on your portfolio?

Expected Return, using CAPM = Risk Free Rate + (Market return - Risk free rate) X beta

Expected Return = 5% + (13%-5%) X 1.3 = 15.4%

18. What is the beta of the following portfolio?

40% Stock A Beta = 1.2

30% Stock B Beta = 1

30% Stock C Beta = 0.9

The beta of a portfolio is the weighted average beta of the individual stocks

beta of portfolio = 1.2X0.4 + 1X0.3 + 0.9X0.3 = 1.05

19. The ...

#### Solution Summary

The solution has various questions relating to risk and return