Question

Stock A has a beta of 1.5 and an expected return of 10%. Stock B has a beta of 1.1 and an expected return of 8%. The current market price for stock A is $20 and the current market price for stock B is $30. The expected return for the market is 7.5%. (assume the risk free asset is a T-bill).

8- What is the risk free rate?

A) 0.25%

B) 1.25%

C) 2.00%

D) 2.50%

E) None of the above

9- What is the expected return on a portfolio consisting of 100 shares of stock A, 60 shares of stock B and $2,200 worth of T-bills.

1. 6.6%
2. 6.9%
3. 7.2%
4. 9.7%
5. None of the above

Answer 1

Solution 8
	Stock return=	Risk free rate + Beta * Risk premium
	Security A
	10%=	Risk free rate + 1.5 * Risk premium
	Risk-free rate=	10% - 1.5*Risk premium
	Security B
	8%=	Risk free rate + 1.1 * Risk premium
	8%=	(10% - 1.5*Risk premium) + 1.1 * Risk premium
	8%=	10% - 1.5*Risk premium + 1.1 * Risk premium
	8%=	10% - 0.4*Risk premium
	0.4*Risk premium=	2%
	Risk premium=	2%/0.4
	Risk premium=	5.00%
	Security A
	10%=	Risk free rate + 1.5 * 5%
	Risk free rate=	2.50%
Solution 9
	Stock	No of shares	Market price	No* Price	Return	Total return
	A	100	20	$     2,000	10.00%	$ 200.00
	B	60	30	$     1,800	8.00%	$ 144.00
	T bill			$     2,200	2.50%	$   55.00
			Total	$6,000.00		$ 399.00
			Portfolio return=	399/6000
			Portfolio return=	6.65%