Question

11. Portfolio Beta

You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio's new beta be after these transactions? Do not round intermediate calculations. Round your answer to two decimal places.

12. Required Rate of Return

Stock R has a beta of 1.7, Stock S has a beta of 0.65, the expected rate of return on an average stock is 8%, and the risk-free rate is 7%. By how much does the required return on the riskier stock exceed that on the less risky stock? Do not round intermediate calculations. Round your answer to two decimal places.

13. Historical Realized Rates of Return

You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns:

Year
2015	-15.00	%	-7.00	%
2016	37.00		23.00
2017	27.00		-11.00
2018	-7.00		46.00
2019	34.00		25.00

1. Calculate the average rate of return for each stock during the 5-year period. Do not round intermediate calculations. Round your answers to two decimal places.

Stock A:   %

Stock B:   %

2. Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Do not round intermediate calculations. Round your answers to two decimal places. Negative values, if any, should be indicated by a minus sign.

Year	Portfolio
2015	%
2016	%
2017	%
2018	%
2019	%
Average return	%

3. Calculate the standard deviation of returns for each stock and for the portfolio. Do not round intermediate calculations. Round your answers to two decimal places.

			Portfolio
Std. Dev.	%	%	%

4. Suppose you are a risk-averse investor. Assuming Stocks A and B are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio? Why?

A risk-averse investor should choose__?, since it offers __? expected return with __? risk.

Answer 1

11. Beta of portfolio = Weight of Stock 1* Beta of Stock 1 + Weight of Stock 2 * Beta of Stock 2 + Weight of Stock n * Beta of Stock n.

Weight of one stock = 100000/2000000 = 0.05

Beta of old stock = 0.9

Beta of new stock = 1.4

New Portfolio Beta = 1.1 - (0.05*0.9 + 0.05*1.4) = 1.125

12. Beta of Stock R = 1.7

Beta of Stock S = 0.65

Expected return on average stock is 8% and risk free rate is 7%

Using CAPM Model, Expected return = Risk free rate + Beta (Return on market or average stock - Risk free rate)

Stock R's expected return = 0.07 + 1.7 (0.08 - 0.07) = 0.07 + 0.017 = 0.087 or 8.7%

Stock S's expected return = 0.07 + 0.65 (0.08 - 0.07) = 0.0765 or 7.65%

Riskier Stock is Stock R as the Beta is higher.

Difference = 8.7 - 7.65 = 1.05 %

13. a, b and c - excel screenshots

For realized yield of portfolio check coloum L result.

d A risk-averse investor should choose_B_?, since it offers _same_? expected return with _lower_? risk. (lower standard deviation)