Question

1. A portfolio consists of two securities and the expected return on them is 11% and 15% respectively. What is the return on this portfolio if the first security constitutes of 45% of the total portfolio?

a) 13%

b) 13.2%

c) 12.8%

d) 12.2%

2. Acme Dynamite Company’s common stock has a beta of 1.60. The expected return on the market is 9%, and the risk-free rate is 5%. What is the required return on Acme’s common stock according to the (CAPM)?

a) 11.4%

b) 19.4%

c) 17%

d) 9%

3. An individual has $20,000 invested in a stock with a beta of 0.9 and another $30,000 in a stock with a beta of 1.3. If these are the only two investments in his portfolio, what is the portfolio’s beta?

a) 1.3

b) 0.9

c) 1.1

d) 1.14

4. Assume that the risk-free rate is 5% and the expected return on the market is 12%. What is the required rate of return on stock with a beta of 0.8?

a) 10.6%

b) 14.6%

c) 12%

d) 9.6%

5. Samsung has $150,000 invested in a 2-stock portfolio. $65,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y’s beta is 0.70. What is the portfolio's beta?

a) 1.2

b) 1.02

c) 1.046

d) 1.46

6. Life Inc's stock has an expected return of 13%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 6%, what is the market risk premium?

a) 5.6%

b) 6.5%

c) 5.8%

d) 4.5%

Answer 1

Question 1

Expected Return of portfolio = Sum of [Weights of stocks * Returns of stock ]

                                         = 45% * 11% + 55% * 15%

                                        = 4.95% + 8.25%

                                        = 13.20% Answer Option B

Question 2

Expected Returns = Risk Free rate + ( Market Returns - Risk Free rate ) * Beta

                          = 5% + ( 9 - 5 ) * 1.6

                          = 11.40% Answer Option A

Question 3

Portfolio Beta = Sum of [ Weight of Stock * Stock Beta ]

                   

Stock	Amount	Weight	Beta	Product
1	20000	20000/ 50000 = 0.4	0.9	0.4 * 0.9 = 0.36
2	30000	30000 / 50000 = 0.6	1.3	0.6 * 1.3 = 0.78
				1.14

                

Portfolio Beta = 1.14 Answer Option D

Question 4

Required Returns = Risk Free rate + ( Market Returns - Risk Free rate ) * Beta

                          = 5% + ( 12 - 5 ) * 0.8

                         = 10.60 % Answer Option A

Question 5

Stock	Amount	Weight	Beta	Product
X	65000	65000 / 150000 = 0.4333	1.5	0.4333 * 1.5 = 0.65
Y	85000	85000 / 150000 = 0.5667	0.7	0.5667 * 0.7 = 0.3967
				1.046

Portfolio Beta = 1.046 Answer Option C

Question 6

Expected Returns = Risk Free rate + ( Market Returns - Risk Free rate ) * Beta

13 = 6 + Market Risk preimum * 1.25

Market Risk Premium = [ 13 - 6 ] / 1.25

                                = 5.6 % Answer Option A

Hope you understand the solution.