Poor 0.25 -12% -2%
Average 0.5 **14**% 6%
Great 0.25 44% **14**%
Market Condition Portfolio return
Poor -7.00% =50.% x -12.% + 50.% x -2.%
Average 10.00% =50.% x **14**.%

For a portfolio
**Beta** of portfolio= **beta** p=summation of wi* **beta** i= w1* **beta** 1 + w2***beta** 2+ w3beta **3** + w4beta 4+---
Security Weight (wi) **Beta** **beta** i wi **beta** i Explanation
Security A 35.00% 1.20 0.4200 =35.%*1.2

Using CAPM, Expected return = Rf + (Rm-Rf) **beta**
**14**% = Rf + (11.5%-Rf) 1.45
**14**% = Rf + 16.675% - 1.45Rf
Rf = (16.675%-**14**%)/.45 = 5.94% The solution explains the calculation of **beta**, expected return, risk free rate using the CAPM equation

Stock r f = **beta** i= r m = r i =
A 4% 1.0500 **14**% 14.5 % =4.%+1.05 x ( **14**.% - 4.% )
B 4% 1.1250 **14**% 15.25 % =4.%+1.125 x ( **14**.% - 4.% )
C 4% 1.1250 **14**% 15.25 % =4.%+1.125 x ( **14**.% - 4.% )
D 4% 0.4000 **14**% 8. % =4.%+0.4 x ( **14**.% - 4.% )

The **beta** of the stock is __________.
1. 1.2 2. 1.0 **3**. 0.8 4. 0.6
Answer: 1. 1.2
(R-Rf) = alpha + **beta** x (Rm-Rf)
If the stock is priced correctly as per CAPM, alpha is zero
(**14**%-2%) = 0% + **beta** x (12%-2%)
Or **beta** = 12% / 10%

Km is the market required rate of return
Krf is the risk free rate
b is the **beta**
**14**% = 8% + (11% - 8%)b
6% = **3**%b
b = 2
B) If Stock B's **beta** were 1.5, what would be B's new required rate of return?

we have
**14**% = Risk free rate + 1.70*(10% - Risk free rate)
or **14**% = Risk free rate + 17% - 1.70*Risk free rate
or 1.70*Risk free rate - Risk free rate = 17% - **14**%
or 0.70*Risk free rate = **3**%
or Risk free rate = **3**%/.70 = 4.285% or 4.29%

10008 Determining Stock Estimated **Beta** Determining Stock Estimated **Beta** First we calculate the portfolio **Beta** using SML:
ER = Rf+(Rm-Rf)***Beta**
i.e. 17 = 7 + (**14**-7)***Beta** or 10 = 7*B
Then **Beta** = 10/7=1.4286
While the portfolio **Beta** is also the weighted

2) If the market required rate of return is **14** percent and the risk-free rate is 6 percent, what is the fund's required rate of return? **3**) Use a spreadsheet or calculator with a linear regression function to determine stock X's **beta** coefficient.

Division 1
The asset **beta** of **industries** like Division 1 is 2.0.
Required rate of return = risk free rate + **beta**(market risk premium)
= 5% + 2.0(9.2%)
= 23.4%
Division 2
The asset **beta** of **industries** like Division 1 is 0.5.