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Portfolio Betas & expected returns

1. You own a stock portfolio invested 25% in stock Q, 20% in stock R, 15% in stock S, and 40% in stock T. The betas for these stocks are .84, 1.17, 1.11, and 1.36 respectively. What is the portfolio beta?

2. (Using CAPM) A stock has a beta of 1.05, the expected return on the market is 11 % and the risk-free rate is 5.2 %. What must the expected return on the stock be?

3. (Using CAPM) A stock has an expected return of 10.2%, the risk-free rate is 4.5%, and the market risk premium is 8.5%. What must the beta of this stock be?

4. (Using CAPM) A stock has an expected return of 13.5%, its beta is 1.17 and the risk-free rate is 5.5%. What must the expected return on the market be?

5. (Using CAPM) A stock has an expected return of 14%, its beta is 1.45, and the expected return on the market is 11.5%. What must the risk-free rate be?

Solution Preview

1. The portfolio beta is the weighted average of the individual stock beta.
Portfolio beta = 0.25 X .84 + 0.20 X 1.17 + 0.15 X 1.11 + 0.4 X 1.36 = 1.1545

2. Using CAPM, Expected return = Rf ...

Solution Summary

The solution explains the calculation of beta, expected return, risk free rate using the CAPM equation

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