If I have a company whose beta is .54,the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium is 6.5%, using the CAPM equation,what is the present cost of equity of my company?
If I have 2 companies, A and B, the beta of A is .50, the beta of B is .23, if I invest 1/3 of my money in each of the stocks of these companies, What will the beta of the portfolio be? If I add my other stock with a beta of .54, what would be the expected rate of return on this portfolio be? Is this 3-stock portfolio well diversified,or does it still have risk that can be diversified away?
Beta = 0.54
Risk Free Rate of return Rf = 4.5%
Market Risk Premium = km-Rf = 6.5%
Required Rate of Return is given by
Kj = Rf +Beta*(Km-Rf)
= 4.5% +0.54*(6.5%)
Cost of equity will be 8.01%
Beta (A) = 0.50
Solution describes the use of CAPM model to calculate cost of equity a particular stock. It also explains the steps in calculating beta and expected rate of return of a portfolio.