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    Calculating expected rate of return

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    Please help with the following problem.

    You are considering investing in a portfolio of the common stocks of four publicly-traded companies with betas as follows:

    ABC - 0.7
    DEF - 0.9
    GHI - 1.3
    JKL - 1.9

    If the risk-free rate is 4.5% and the market rate is 8.5%, what is your expected rate of return of following stocks?

    a. ABC?
    b. DEF?
    c. GHI?
    d. JKL?
    e. If your portfolio is 20% in ABC, 30% in DEF, 30% in GHI, and 20% in JKL, what is your portfolio (weighted average) expected rate of return?

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    Solution Preview

    Problem: If the risk-free rate is 4.5% and the market rate is 8.5%, what is your expected rate of return of following stocks?

    Solution:

    a. ABC?
    Expected return=risk free rate+ beta*(market rate-risk free rate)
    =4%+0.7*(8.5%-4.5%)
    ...

    Solution Summary

    The following solution describes the steps for calculating expected rate of return on given stocks. It also calculates expected return from a portfolio consisting of these stocks. Step by step calculations are given for each problem.

    $2.19

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