Question

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $20,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Zacher Co.'s stock has a beta of 1.12, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Porter Plumbing's stock had a required return of 14.25% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

Select the correct answer.

a. 17.93%

b. 18.33%

c. 18.73%

d. 19.13%

e. 19.53% Stock A's stock has a beta of 1.30, and its required return is 13.25%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) a. 9.92% b. 9.95% c. 9.98% d. 10.01% e. 10.04%

Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.50%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

Select the correct answer.

a. 10.15%

b. 10.07%

c. 10.09%

d. 10.11%

e. 10.13%

Answer 1

Part 1:

Total investment=100000
Percentage of the amount invested in stock X=20000/100000=20%
Percentage of the amount invested in stock Y=80000/100000=80%
Portfolio beta=(Percentage of the amount invested in stock X)*(Beta of stock X) + (Percentage of the amount invested in stock Y)*(Beta of stock Y)
Portfolio beta=20%*1.5+80%*0.7=0.86

Part 2:

Required rate of return=Risk free rate + Beta*(Market risk premium)
=4.25% + 1.12*5.50%=10.41%

Part 3:
Answer: Option a is correct.
Required rate of return=Risk free rate + Beta*(Market risk premium)
Substituting the values, we get
14.25%=5.50%+Beta*4.75%
=>14.25%-5.50%=Beta*4.75%
=>0.0875=Beta*4.75%
=>Beta=0.0875/4.75%=1.842105263
When market risk premium increases by 2%:
Required rate of return=5.50%+1.842105263*(4.75%+2%)=17.93%

Part 4:
Answer: Option c is correct.
Required rate of return=Risk free rate + Beta*(Market risk premium)
Substituting the values for stock A, we get
13.25%=4.75%+1.30*Market risk premium
=>13.25%-4.75%=1.30*Market risk premium
=>0.085=1.30*Market risk premium
Market risk premium=0.085/1.30=0.065384615
Calculation of required rate of return on B's stock:
Required rate of return on B's stock=4.75% + 0.80*0.065384615=9.98%

Part 5:
Answer: Option a is correct.
Required rate of return=Risk free rate + Beta*(Market return -Risk free rate)
11.50%=4.30% + 1.23*(Market return - 4.30%)
11.50%-4.30%=1.23*Market return - 1.23*4.30%
0.072=1.23*Market return - 0.05289
0.072 + 0.05289 =1.23*Market return
=>0.12489 =1.23*Market return
=>0.12489/1.23=Market return
=>10.15%=Market return