Matthew decides to invest $1,200,000 into the following five stocks: Stock 1= $500,000 β= 1.22 Stock...

Matthew decides to invest $1,200,000 into the following five stocks:

Stock 1= $500,000 β= 1.22

Stock 2= $300,000 β= 0.21

Stock 3= $140,000 β= 0.92

Stock 4= $160,000 β= -0.36

Stock 5= $100,000 β= 2.35

Risk free rate: 2.50%

Expected market return is 7%.

What is the required rate of return for the above?

Please show equations/formulas used in excel to explain how you got the answer. Thanks!

Expert Solution

Ans 6.17%

Stock	INVESTMENT (i)	Beta (ii)	Investment* Beta (i)* (ii)
1	5,00,000	1.22	6,10,000.00
2	3,00,000	0.21	63,000.00
3	1,40,000	0.92	1,28,800.00
4	1,60,000	(0.36)	(57,600.00)
5	1,00,000	2.35	2,35,000.00
Total	12,00,000		9,79,200


AVERAGE BETA =	(INVESTMENT * BETA) / TOTAL INVESMENT
	979200 / 1200000
	0.816

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	2.50% + (7% - 2.50%)*0.816
Required Return =	6.17%

jeff jeffy answered 1 year ago

A group of investors decides to invest $500,000 in the stocks of three companies. Company D...

A group of investors decides to invest $500,000 in the stocks of three companies. Company D sells for $60 a share and has an expected growth of 16% per year Company E sells for $80 a share and has an expected growth of 12% per year Company F sells for $30 a share and has an expected growth of 9% per year. The group plans to buy twice as many shares of company F as of company E. If the...

Matthew Industries issued $500,000 of their ten-year, 6% bonds for $535,000. Each $1,000 bond carries five...

Matthew Industries issued $500,000 of their ten-year, 6% bonds for $535,000. Each $1,000 bond carries five warrants that allow the holder to purchase one share of $10 par common stock for $50. Shortly after issuance, the warrants were quoted on the market for $22 each (i.e., for a total of $55,000), and the bonds without the warrants sold in the market at 99 (i.e., for a total of $495,000). The stock warrants should be recorded at $_______________________

4. Paying taxes on stocks What It Means to Invest in Stocks? Common stock is considered...

4. Paying taxes on stocks What It Means to Invest in Stocks? Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective. Two years ago, Akshay purchased 100 shares of a particular company’s stock at a price of $107.57 per share....

What It Means to Invest in Stocks? Common stock is considered to be one of the...

What It Means to Invest in Stocks? Common stock is considered to be one of the most popular investment vehicles for long-term wealth building. Investors earn income from common stock in the form of dividends and/or capital gains. As an investor it is important to understand the implications of investing in stocks from a tax perspective. Two years ago, Clancy purchased 100 shares of a particular company’s stock at a price of $136.55 per share. Last year, Clancy received an...

1. Why do people invest in stocks? Is stock a riskier investment than bonds? Why or...

1. Why do people invest in stocks? Is stock a riskier investment than bonds? Why or why not? How is preferred stock similar to bonds? To common stock? 2. Why would economic growth affect the value of a stock? 3. What are the limitations of the generalized dividend model? 4.What are the risks faced by investors investing in stocks in emerging markets? 5.What is the motivation for buying foreign stocks?

You invest $2000 in stock A and $2000 in stock B. The two stocks have betas...

You invest $2000 in stock A and $2000 in stock B. The two stocks have betas of 1.2 and 1.4. What is the beta of the portfolio? A. .95 B. 1.01 C. 1.20 D. 1.30 E. 1.40

On 1 July 2018, Adat Ltd. purchased land for $1,200,000 and buildings for $500,000 paying cash....

On 1 July 2018, Adat Ltd. purchased land for $1,200,000 and buildings for $500,000 paying cash. The estimated useful life of the buildings was 40 years, with $20,000 residual value. On 1 October 2018 machinery was purchased for cash at a total cost of $117,000. Installation costs of $3,000 were also paid. The estimated useful life of the machinery was 4 years with an estimated residual value of $8,000. Adat Ltd. uses straight line depreciation. The entity’s balance date...

Let's say that you are looking to invest in two stocks A and B. Stock A...

Let's say that you are looking to invest in two stocks A and B. Stock A has a beta of 1.19 and based on your best estimates is expected to have a return of 13%. Stock B has a beta of 1.61 and is expected to earn 7%. If the risk-free rate is currently 2% and the expected return on the market is 12%, which stock(s) should you invest in, if any? Work by hand no financial calculator

You are faced with opportunity to invest in one of two stocks. Stock A is currently...

You are faced with opportunity to invest in one of two stocks. Stock A is currently selling for $35 and Stock B is currently selling for $25. You have the following information about these companies: - Stock A just paid a dividend of $1.20 and expects to grow at 10% for 5 years and at 5% after that in perpetuity. It has a required return of 9% - Stock B is a more well-established company and as such it is...

Stocks A and B have the following returns: Stock A Stock B 1 0.11 ...

Stocks A and B have the following returns: Stock A Stock B 1 0.11 0.06 2 0.06 0.04 3 0.15 0.04 4 0.03 0.01 5 0.07 -0.03 a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 56% stock A and 44%...

Question