Question

1. An individual has $30,000 invested in a stock with a beta of 0.3 and another $50,000 invested in a stock with a beta of 2.3. 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.

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2. Assume that the risk-free rate is 5.5% and the required return on the market is 10%. What is the required rate of return on a stock with a beta of 2? Round your answer to two decimal places.

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3. Assume that the risk-free rate is 3.5% and the market risk premium is 7%. What is the required return for the overall stock market? Round your answer to one decimal place.

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What is the required rate of return on a stock with a beta of 0.6? Round your answer to one decimal place.

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Answer 1

1. The portfolio beta is computed as follows:

= Beta of 1st investment x weight of 1st investment + Beta of 2nd investment x weight of 2nd investment

= 0.3 x ($ 30,000 / $ 80,000) + 2.3 x ($ 50,000 / $ 80,000)

= 1.55

2. The return is computed as follows:

= risk free rate + Beta x (return on market - risk free rate)

= 5.5% + 2 x (10% - 5.5%)

= 5.5% + 9%

= 14.5%

3. The return of the overall stock market is computed as follows:

= risk free rate + Beta x market risk premium (Beta of market is always 1)

= 3.5% + 1 x 7%

= 10.5%

The return is computed as follows:

= risk free rate + Beta x market risk premium

= 3.5% + 0.6 x 7%

= 7.7%