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.
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