Question

17. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. What’s the expected return

A. 12.8%

B. 9.5%

C. 15.0%

D. 4.0%

18. The stock of Alpha Company has an expected return of 0.10 and a standard deviation of 0.25. The stock of Gamma Company has an expected return of 0.16 and a standard deviation of 0.40. The correlation coefficient between the two stock’s return is 0.2. If a portfolio consists of 40% of Alpha Company and 60% of Gamma Company, what’s the expected return of the portfolio?

A. 0.126

B. 0.136

C. 0.160

D. 0.130

19. You have the following data on the securities of three firms: Return last year Beta Firm A 10% 0.8 Firm B 11% 1.0 Firm C 12% 1.2 If the risk-free rate last year was 3%, and the return on the market was 11%, which firm had the best performance on a risk-adjusted basis?

A. Firm A

B. Firm B

C. Firm C

D. There is no difference in performance on a risk-adjusted basis

20. An investor has $10,000 invested in Treasury securities and $15,000 invested in stock UVW. UVW has a beta of 1.2. What is the beta of the portfolio?

A. 0.00

B. 0.72

C. 1.20

D. 1.60

Answer 1

Answer (1)

Expected Return of portfolio = (4%*0.20) + (15%*0.80) = 0.80% + 12% = 12.8%

Option (A) is the answer

Answer (2)

Expected return of alpha = 0.10

Expected retirn of Gamma =0.16

Weight of alpha = 0.40

weight og gamma = 0.60

Expected return of portfolio = (0.10*0.40) + (0.16*0.60 ) = 0.04 + 0.096 = 0.136

Option (B) is the answer

Answer (3)

Calculation of Required rate of return using CAPM

Ke = Rf + beta*(E(rm) - Rf)

Firm (A) = 3% + 0.80(11% - 3%) = 9.40%

Firm (B) = 3% + 1(11% - 3%) = 11%

Firm (C) = 3% + 1.20(11% - 3%) = 12.60%

Last year returns

Firm (A) = 10%

Firm (B) = 11%

Firm (C) = 12%

Firm (C) has the best performance , because Return 12.60% more than last year return 12%

Answer (4)

Treasury securities is the risk free securities, Hence the beta of risk free = 0

So, the portfolio beta is weightage average beta

Portfolio beta =( 0*10/25) + (1.20*15/25) = 0.72

option (B) is the answer