Question

1.An individual has $15,000 invested in a stock with a beta of 0.5 and another $50,000 invested in a stock with a beta of 1.6. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

2.Assume that the risk-free rate is 7.5% and the required return on the market is 9%. What is the required rate of return on a stock with a beta of 3? Round your answer to two decimal places. 3. Assume that the risk-free rate is 6.5% and the market risk premium is 7%. What is the required return for the overall stock market? Round your answer to one decimal place.   % What is the required rate of return on a stock with a beta of 0.7? Round your answer to one decimal place.

Answer 1

Required Ret = Rf + Beta ( Rm - Rf )

Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Part 1:

Portfolio Beta:

It is weighted Avg Beta of securities in that portfolio.

Security	Amount	Weights	Beta	Wtd Beta
Stock 1	$      15,000.00	0.2308	0.50	0.12
Stock 2	$      50,000.00	0.7692	1.60	1.23
Portfolio Beta				1.35

Portfolio Beta is 1.35

Part 2:

Particulars	Amount
Risk Free Rate	7.5%
Market Return	9.0%
Beta	3.0000
Risk Premium ( Rm - Rf)	1.50%

Beta Specifies Systematic Risk. Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

SML Return = Rf + Beta ( Rm - Rf )
= 7.5 % + 3 ( 1.5 % )
= 7.5 % + ( 4.5 % )
= 12 %

Rf = Risk Free rate

Part 3:

A)

Particulars	Amount
Risk Free Rate	6.5%
Market Return	13.5%
Beta	1.0000
Risk Premium ( Rm - Rf)	7.00%

Beta Specifies Systematic Risk. Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

SML Return = Rf + Beta ( Rm - Rf )
= 6.5 % + 1 ( 7 % )
= 6.5 % + ( 7 % )
= 13.5 %

Rf = Risk Free rate

B)

Particulars	Amount
Risk Free Rate	6.5%
Market Return	13.5%
Beta	0.7000
Risk Premium ( Rm - Rf)	7.00%

Beta Specifies Systematic Risk. Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

SML Return = Rf + Beta ( Rm - Rf )
= 6.5 % + 0.7 ( 7 % )
= 6.5 % + ( 4.9 % )
= 11.4 %

Rf = Risk Free rate