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.
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
... following four stocks: Standard deviation of market returns= 0.20. ... Use the SML to estimate the return on each ... stocks in 4). Compute the expected return on the ...
... explains some questions relating to beta, CAPM, risk... invested in Stock B. If the expected returns on. ... and 10 percent, respectively, the expected return on the ...
... The solution answers two questions: 1) calculates each stock's expected rate of return using the CAPM, given beta, risk free rate and market risk premium 2 ...
... The beta on the other hand may indicate an ... investment's risk-free rate and its expected returns within the ... The required rate of return however is the minimum ...
... Security B has an expected return of 12 percent, a standard deviation of returns of 10 ... a correlation with the market of 0.7, and a beta coefficient of ...
... a beta of 0.5 H) Corp H has a beta of 1.6 1 ... Below are the returns on stocks of A & B ... for the 4 possible economic conditions, calculate the expected return for A ...
... Since beta measures unsystematic risk - it is used to calculate the expected return for a stock or a portfolio. returns of 25%, and a beta of 1.25. ...
... Proportion of Stock B 0.25 Expected return of portfolio ... b) Compare the above returns and risk...Risk Return Risk/Return Portfolio 1 1.00% 12.00% 0.08 Portfolio 2 ...
