In: Finance
Question 14
A portfolio contains 161 shares of Stock A that sell for $42 each, 306 shares of Stock B that sell for $95 each and 55 shares of Stock C that sell for $61 each. What is the portfolio expected return if the expected returns on these stocks is 14.9%, 11.1%, and 7.9% respectively?
Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 12.345% then enter as 12.35 in the answer box.
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Question 15
The common stock of Detroit Engines has a beta of 1.54 and expected returns of 14.54 percent. The expected return on the market is 3.31 percent. What is the risk-free rate?
Hint: Use the CAPM equation to get the answer.
Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box.
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Question 16
Suppose your portfolio consists of Stock A and Stock B. Stock A has an expected return of 18.5% and Stock B has an expected return of 4.2%. If your goal is to create a portfolio with an expected return of 12.6%, what is your weight in Stock B?
Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 12.345% then enter as 12.35 in the answer box.
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Question 17
You want a portfolio as risky as the market. Given the information below, compute the weight of the risk-free asset.
Enter your answer in percentages, rounded off to two decimal points. Do not enter % in the answer box.
Asset | Investment | Beta |
Stock A | 40.00% | 1.4 |
Stock B | 25.00% | 0.9 |
Stock C | ? | 2.25 |
Risk-free asset | ? | ? |
Question 14
A portfolio contains 161 shares of Stock A that sell for $42 each, 306 shares of Stock B that sell for $95 each and 55 shares of Stock C that sell for $61 each. What is the portfolio expected return if the expected returns on these stocks is 14.9%, 11.1%, and 7.9% respectively?
Expected return=(161*42*14.9%+306*95*11.1%+55*61*7.9%)/(161*42+306*95+55*61)=11.4817%
Question 15
The common stock of Detroit Engines has a beta of 1.54 and expected returns of 14.54 percent. The expected return on the market is 3.31 percent. What is the risk-free rate?
Case 1: Given data is correct
Expected return according to CAPM=risk free rate+beta*(market return-risk free rate)
=>14.54%=risk free rate+1.54*(3.31%-risk free rate)
=>risk free rate=-17.486%
Case 2: Assuming typo of market return. It should be 13.31% and not 3.31%
Expected return according to CAPM=risk free rate+beta*(market return-risk free rate)
=>14.54%=risk free rate+1.54*(13.31%-risk free rate)
=>risk free rate=11.03%
Question 16
Suppose your portfolio consists of Stock A and Stock B. Stock A has an expected return of 18.5% and Stock B has an expected return of 4.2%. If your goal is to create a portfolio with an expected return of 12.6%, what is your weight in Stock B?
Let weight of Stock B be w and weight of Stock A be 1-w
Hence, returns of portfolio=w*4.2%+(1-w)*18.5%
=>12.6%=w*4.2%+(1-w)*18.5%
=>w=0.412587 or 41.26%
Question 17
You want a portfolio as risky as the market. Given the information below, compute the weight of the risk-free asset.
Asset Investment Beta
Stock A 40.00% 1.4
Stock B 25.00% 0.9
Stock C ? 2.25
Risk-free asset ? ?
Let weight of Stock C in portfolio be w and weight of risk free asset be 1-w-0.4-0.25=0.35-w
Beta of risk free asset is zero and beta of market is 1
For portfolio to be as risky as market beta of portfolio must be equal to 1
beta of portfolio=0.4*1.4+0.25*0.9+w*2.25+(o.35-w)*0
=>1=0.4*1.4+0.25*0.9+w*2.25+(0.35-w)*0
=>w=0.0956
So, Investment in Stock C is 9.56% and in risk free asset it is 35%-9.56%=25.44%