A stock has a beta of 0.6 and an expected return of 14%. The risk free rate is 3% and the expected return on the market portfolio is 12%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM?

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Jean KeelingLv2

1 Jul 2019

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A stock has a beta of 0.9 and an expected return of 14%. The risk free rate is 2% and the expected return on the market portfolio is 8%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM? Enter answer in percents, accurate to two decimal places.

magentalion116

A stock has a beta of 1.1 and an expected return of 14%. The risk free rate is 2% and the expected return on the market portfolio is 8%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM? Enter answer in percents, accurate to two decimal places.

salmonlouse447

Market portfolio has an expected return of 11% and volatility of 20%. Risk-free rate is 3%. Security X and Y have betas of 1.4 and 0.9 respectively.

a) According to CAPM, what are the expected return of X and Y?

E(rm)-rf = 11% - 3% = 8%

3% +1.4*8% = 14.2%

3% +1.4 *8% = 10.2%

b) What should be X worth today, if X pays a dividend of $1.2 one year from today and is priced at 30 one year from today? The required rate of return is the expected return using CAPM from part a).

c) If security X has expected return of 15%, is it underprice/overprice/fairly priced according to CAPM? What is its alpha?

d) Plot SML and label X, Y and Market portfolio on the line.

e) What is the beta of a portfolio with 50% in X and 50% in Y?

f)What is the beta of a portfolio with 55% in Market portfolio and 45% in risk-free asset?

g) You are investing in a complete portfolio. The complete portfolio is composed of risk-free asset and a risky portfolio, P, constructed with 20% in X and 80% in Y. It turns out that your complete portfolio has an expected rate of return of 9.4%. What is the beta of your complete portfolio? (hint: you may or may not use all information to solve this problem)

Q2. Stock A has a beta of 1 and standard deviation of 50%. Market portfolio has a standard deviation of 20%. What is the correlation of stock A with the market portfolio? How much of stock Aâs total risk is due to market risk?

Q3. Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. A stock has an expected return of 6%. What is its beta?

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A stock has a beta of 0.6 and an expected return of 14%. The risk free rate is 3% and the expected return on the market portfolio is 12%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM?

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