Question

In: Finance

Your portfolio consists of 1,000 shares of stock A and 1,000 shares of stock B. At...

Your portfolio consists of 1,000 shares of stock A and 1,000 shares of stock B. At today's market open their respective prices per share are $7.50 and $21. What are their respective weights in the portfolio at today's market open prices? (rounded to two decimals).

They have equal weights

0.40 and 0.60

0.35 and 0.65

0.26 and 0.74.

1 points

QUESTION 32

What is your portfolio's beta if stock A's beta is 1.8 and that of B is 0.4.

0.76

1.10

1.00

0.9

0.86

Based on the CAPM what is the 1-year expected return on stock A, if the risk-free rate is 1% and the expected return on the market is 12%. ?

		9.76%
		12.23%
		20.8%
		18.14%
		30.10%

Given today's open price, what is the expected 1-year return on stock B, if it does not pay dividends, and if you expect that one-year hence the stock will sell for $23.0?

		9.96%
		8.11
		9.34
		9.52%
		10%.

Based on the CAPM, stock A is overpriced at today's market open.

TRUE

FALSE.

Based on the CAPM stock B is overpriced at today's market open.

TRUE

FALSE.

Based on the CAPM what should be the expected return on your portfolio?

12.89%

11.46%

8.99%

9.87%

9.36%

Expert Solution

Stock A's value in portfolio = $ 1000 * 7.5 = $ 7500

Stock A's value in portfolio = $ 1000 * 21 = $ 21000

A' s weight in portfolio = A's value/ Total Value of Portfolio = $ 7500/ ( $ 7500 + $ 21000) = 0.26 (w1)

B' s weight in portfolio = B's value/ Total Value of Portfolio = $ 21000/ ( $ 7500 + $ 21000) = 0.74 (w2)

Ans is D) 0.26 & 0.74

Beta for portfolio = w1 * A's beta + w2 * B's beta

= 0.26 * 1.8 + 0.74 * 0.4

= 0.76

Ans is A) 0.76

1 year return on stock A = Risk free rate + beta * Market risk Premium

= 1% + 1.8 * (12% -1%)

= 20.8%

Ans is C) 20.8%

Expected Return on Stock B = ($23 - $21)/ $21 = 9.52%

Ans is D) 9.52%

Considering the return on stock A is higher than the market return, it is not overpriced => False

Return on stock B is lower than the market return and hence, it is overpriced => True

Expected return on portfolio = Risk free rate + beta of portfolio* Market risk Premium

= 1% + 0.76 * (12% -1%)

= 9.36% => E) 9.36%

jeff jeffy answered 2 hours ago

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