Question

4.) You have ​$55,000. You put 15​% of your money in a stock with an expected return of 13​%, ​$38,000 in a stock with an expected return of 15​%, and the rest in a stock with an expected return of 23​%. What is the expected return of your​ portfolio?

12.) The​ risk-free rate is 4.9​% and you believe that the​S&P 500's excess return will be 8.5​% over the next year. If you invest in a stock with a beta of 1.4 ​(and a standard deviation of 30​%), what is your best guess as to its expected excess return over the next​ year?

13.) Suppose the​ risk-free return is 4.7% and the market portfolio has an expected return of 10.1% and a standard deviation of 16%. Johnson​ & Johnson Corporation stock has a beta of 0.30. What is its expected​ return?

16.) Suppose Autodesk stock has a beta of 2.30​, whereas Costco stock has a beta of 0.68. If the​ risk-free interest rate is 6.5% and the expected return of the market portfolio is 14.0%​, what is the expected return of a portfolio that consists of 70 % Autodesk stock and 30 % Costco​ stock, according to the​ CAPM?

Answer 1

4). Amount invested in 3rd Stock = Total Amount - Amount invested in 1st stock - Amount invested in 2nd stock

= $55,000 - (0.15 * $55,000) - $38,000 = $17,000 - $8,250 = $8,750

Expected Return on the Portfolio = [Weight(i) * Return(i)]

= [0.15 * 13%] + [(38,000/55,000) * 15%] + [(8,750/55,000) * 23%]

= 1.95% + 10.36% + 3.66% = 15.97%

12). Beta = Asset's Excess Return / Market's Excess Return

Asset's Excess Return = Beta * Market's Excess Return

= 1.4 * 8.5% = 11.9%

13). According to the CAPM,

Expected Return = Risk-free Rate + [Beta * (Expected Return on the market - Risk-free Rate)]

= 4.7% + [0.30 * (10.1% - 4.7%)]

= 4.7% + [0.30 * 5.4%]

= 4.7% + 1.62% = 6.32%

16). Portfolio's Beta = [Weight(i) * Beta(i)]

= [0.70 * 2.30] + [0.30 * 0.68]

= 1.61 + 0.204 = 1.814

According to the CAPM,

Expected Return = Risk-free Rate + [Beta * (Expected Return on the market - Risk-free Rate)]

= 6.5% + [1.814 * (14% - 6.5%)]

= 6.5% + [1.814 * 7.5%]

= 6.5% + 13.605% = 20.105%