In: Finance
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?
Solution :
1 ) The Investor's portfolio beta is = 1.30
Please find attached the screenshot of the excel sheet containing the detailed calculation for the above solution.
Solution :
2) As per CAPM the expected return of a stock can be calculated using the following formula:
RE = RF + [ β * ( RM - RF ) ]
Where
RE = Expected Return of a stock ; RF = Risk free rate of return ; β = Beta of the stock ;
RM = Return on the market
As per the information given in the question we have
RE = 11.25 % ; RF = 3.58 % ; RM = 9.57 % ; β = To find
Applying the above values in the formula we have
11.25 % = 3.58 % + [ β * ( 9.57 % - 3.58 % ) ]
11.25 % - 3.58 % = β * 5.99 %
7.67 % = β * 5.99 %
= 7.67 / 5.99 = 1.2805
β = 1.28 ( When rounded off to two decimal places )
Thus the Beta of the stock is = 1.28