FINE 2000 Chapter Notes - Chapter 12: Market Risk, Weighted Arithmetic Mean, Risk Premium

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14 Jun 2016

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Ch 12 risk, return and capital budgeting. The market portfolio - portfolio of all assets in the economy: used as a benchmark to measure the risk of individual stocks. Beta (b) - sensitivity of a stock"s return to the return on the market portfolio. Portfolio beta: the weighted average of the betas of the individual assets; (weights equal the proportion of wealth invested in each asset) For a portfolio with two stocks: b = (fraction of portfolio in 1st asset x b 1st asset) + (fraction of portfolio in 2nd asset x b 2nd asset) Risk and return and capital asset pricing model, capm. Market risk premium = market return return on risk-free asset. Benchmark betas beta of the risk-free asset = 0 beta of the market portfolio = 1. Capital asset pricing model (capm): theory of the relationship btw risk & return which states -> expected risk premium on any security = its beta x the market risk premium.

Related Questions

1.a) You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.26 and the total portfolio is equally as risky as the market. What must the beta be for the other stock in your portfolio?

1.b) A stock has an expected return of 17.8 percent, the risk-free rate is 5.1 percent, and the market risk premium is 8.4 percent. What must the beta of this stock be?

amaranthkoala91

a. An individual plans to invest in Stock A and/or Stock B. Theexpected returns are 9% and 10% for Stocks A and B, respectively.The betas are 0.95 and 1.25 for Stocks A and B, respectively. Findthe expected return and beta for the portfolio if the individualinvests 75% of his funds in Stock A. (E(R_p) = 9.25%,Î²_p = 1.025)

b. Suppose the individual described in Part a, forms a portfolioconsisting of three assets: 10% invested in Stock A, 30% investedin Stock B, and 60% invested in a risk-free asset with a return of6%. What is the expected return and beta for this portfolio?

cyanweasel206

1. You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 35 percent in Stock S, and 30 percent in Stock T. The betas for these four stocks are 1.1, 0.8, 1.2, and 0.9, respectively. What is the portfolio beta? (Round your answer to 3 decimal places.)

2. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.95, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places.)

Beta
3. A share of stock sells for $38 today. The beta of the stock is 1, and the expected return on the market is 17 percent. The stock is expected to pay a dividend of $1.10 in one year. If the risk-free rate is 3.7 percent, what should the share price be in one year? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Share price

4. A stock has a beta of 0.7 and an expected return of 9 percent. A risk-free asset currently earns 4 percent.

a.	What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Expected return

b.	If a portfolio of the two assets has a beta of 0.6, what are the portfolio weights?(Round your answers to 2 decimal places. Omit the "%" sign in your response.)

	Weight
x_S	%
x_rf	%

c.	If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (Round your answer to 2 decimal places.)

Beta

d.	If a portfolio of the two assets has a beta of 2.80, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response.)

	Weight
x_S	%
x_rf	%

5. Asset W has an expected return of 8 percent and a beta of 2. If the risk-free rate is 5.5 percent, what is the market risk premium? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Market risk premium

6. Stock Y has a beta of 1.5 and an expected return of 12 percent. Stock Z has a beta of 0.8 and an expected return of 8 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Risk-free rate

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FINE 2000 Chapter Notes - Chapter 12: Market Risk, Weighted Arithmetic Mean, Risk Premium

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