Question

In: Finance

An investor is forming a portfolio by investing $50,000 in stock A which has a beta...

An investor is forming a portfolio by investing $50,000 in stock A which has a beta of 1.50, and $25,000 in stock B which has a beta of 0.90. The return on the market is equal to 6% and treasure bonds have a yield of 4% (rRF). What’s the portfolio beta?

0.60

1.30

1.40

1.80

Using the information from above, what’s the required rate of return on the investor’s portfolio?

5.2%

5.8%

6.6%

7.4%

Solutions

Expert Solution

Given,

Investment in stock A = $50000

Stock A beta = 1.50

Investment in stock B = $25000

Stock B beta = 0.90

Return on the market = 6%

Risk free rate = 4%

Solution :-

Total investment = Investment in stock A + Investment in stock B

= $50000 + $25000 = $75000

Weight of stock A = $50000/$75000 = 2/3

Weight of stock B = 1 - 2/3 = 1/3

Now,

Portfolio beta = (weight of stock A x stock A beta) + (weight of stock B x stock B beta)

= (2/3 x 1.50) + (1/3 x 0.90)

= 1 + 0.30 = 1.30

Required rate of return = Risk free rate + (portfolio beta) x (return on the market - risk free rate)

= 4% + (1.30) x (6% - 4%)

= 4% + (1.30) x (2%)

= 4% + 2.6% = 6.6%


Related Solutions

An investor is forming a portfolio by investing $50,000 in stock A that has a beta...
An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 0.5, and $25,000 in stock B that has a beta of 0.90. What is the beta of the combined portfolio?
An investor is forming a portfolio by investing $150,000 in stock A which has a beta...
An investor is forming a portfolio by investing $150,000 in stock A which has a beta of 2.40, and $150,000 in stock B which has a beta of 0.60. The market risk premium is equal to 5% and treasure bonds have a yield of 3% (rRF). What’s the portfolio beta? 1.60 1.95 1.50 1.80 Using the information in Question, calculate the required rate of return on the investor’s portfolio 8.5% 10.5% 12.75% 9.5%
1) An investor is forming a portfolio by investing $58500 in Stock A, which has a...
1) An investor is forming a portfolio by investing $58500 in Stock A, which has a beta of 1.45, and $16500 in Stock B, which has a beta of 0.76. What is the investor's portfolio beta?   2) The common stock of Jensen Shipping has an expected return of 11.25 percent. The return on the market is 9.57 percent, and the risk-free rate of return is 3.58 percent. What is the beta of this stock?
Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta...
Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%. The followings are the probability distributions of Stocks X and Y’s future returns: State of Economy          Probability rx                      rY Recession 0.1                               -10%                -35% Below average             0.2                               2% 0% Average                        0.4                               12%                 20% Above average 0.2                               20%                 25% Boom                           0.1                               38%                ...
You want to design a portfolio has a beta of zero. Stock A has a beta...
You want to design a portfolio has a beta of zero. Stock A has a beta of 1.69 and Stock B’s beta is also greater than 1. You are willing to include both stocks as well as a risk-free security in your portfolio. If your portfolio will have a combined value of $5,000, how much should you invest in Stock B? a) $2,630 b) $0 c) $2,959 d) $3,008 e) $1,487
An investor with a risk aversion coefficient of A=2.5 is considering forming a portfolio with a...
An investor with a risk aversion coefficient of A=2.5 is considering forming a portfolio with a risk-free and a risky asset. The risk-free rate is 4%, the risky asset has an expected return of 12% with a standard deviation of 20%. (a) Calculate a utility table with weights in 10% increments (0%, 10%, 20%, … 100%) between risk-free and risky asset. (b) Find the set of weights that maximizes the utility for such investor.
PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and...
PORTFOLIO BETA An individual has $45,000 invested in a stock with a beta of 0.8 and another $30,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.
A company has a $36 million stock portfolio with a beta of 2. The portfolio is...
A company has a $36 million stock portfolio with a beta of 2. The portfolio is very highly correlated with the S&P 500 index. The futures price for a contract written on the S&P 500 index is 2500. One futures contract is for delivery of 50 times the index value. What futures trade is necessary to reduce the beta of the combined stock portfolio and futures position to 0.9?
A company has a $36 million stock portfolio with a beta of 1.2. The portfolio is...
A company has a $36 million stock portfolio with a beta of 1.2. The portfolio is very highly correlated with the S&P 500 index. The futures price for a contract written on the S&P 500 index is 2500. one futures contract is for delivery of 50 times the index value. What futures trade is necessary to reduce the beta of the combined stock portfolio and futures position to 0.9?
Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000...
Johnny's portfolio consists of $100,000 invested in a stock which has a beta = 0.9, $150,000 invested in a stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.5. The risk-free rate is 4 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has decreased by 2 percent (This year market risk...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT