Question

In: Finance

You own $1,600 of Soap Corp. stock that has a beta of 2.1. You also own...

You own $1,600 of Soap Corp. stock that has a beta of 2.1. You also own $2,800 of Shampoo (beta = 1.25), $1,250 of Rinse (beta = 0.6) and $3,750 of Waxway (beta = 3.6). Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent. What is the total risk premium of the portfolio?

Solutions

Expert Solution

Total Portfolio value = Value of Soap + Value of Shampoo + Value of Rinse + Value of Waxway
=1600+2800+1250+3750
=9400
Weight of Soap = Value of Soap/Total Portfolio Value
= 1600/9400
=0.1702
Weight of Shampoo = Value of Shampoo/Total Portfolio Value
= 2800/9400
=0.2979
Weight of Rinse = Value of Rinse/Total Portfolio Value
= 1250/9400
=0.133
Weight of Waxway = Value of Waxway/Total Portfolio Value
= 3750/9400
=0.3989
Beta of Portfolio = Weight of Soap*Beta of Soap+Weight of Shampoo*Beta of Shampoo+Weight of Rinse*Beta of Rinse+Weight of Waxway*Beta of Waxway
Beta of Portfolio = 2.1*0.1702+1.25*0.2979+0.6*0.133+3.6*0.3989
Beta of Portfolio = 2.2457
As per CAPM
expected return = risk-free rate + beta * (expected return on the market - risk-free rate)
Expected return% = 6.5 + 2.2457 * (15 - 6.5)
Expected return% = 25.59

Risk premium = Expected return-risk free rate = 25.59-6.5=19.09

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

You own $11,153 of Olympic Steel stock that has a beta of 1.98. You also own...
You own $11,153 of Olympic Steel stock that has a beta of 1.98. You also own $20,545 of Rent-a-Center (beta = 1.58) and $27,002 of Lincoln Educational (beta = 0.73). What is the beta of your portfolio? (Round your answer to 2 decimal places.)
Stock A has a beta of 1.5, but Stock B has a beta of 0.5. You...
Stock A has a beta of 1.5, but Stock B has a beta of 0.5. You expect the market to increase by 7.5 percent and you could earn 2.0 percent in a risk-free asset. What is the required return for each stock? If you invest $3,500 in Stock A and $6,500 in Stock B, what is the portfolio beta?
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
Spam Corp. is financed entirely by common stock and has a beta of .75. The firm...
Spam Corp. is financed entirely by common stock and has a beta of .75. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.80 and a cost of equity of 12.82%. The company’s stock is selling for $54. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 3.5%. The company is...
ABC Corp. is financed entirely by common stock and has a beta of 1.0. The firm...
ABC Corp. is financed entirely by common stock and has a beta of 1.0. The firm is      expected to generate a level, perpetual stream of earnings and dividends. The stock     has a price–earnings ratio of 8 and a cost of equity of 12.5%. The company's stock is     selling for $50. Now the firm decides to repurchase half of its shares and      substitute an equal value of debt. The debt is risk-free, with a 5% interest rate.     The company is exempt...
4.   Stock A has a beta of 1.3, Stock B has a beta of 0.8, the...
4.   Stock A has a beta of 1.3, Stock B has a beta of 0.8, the expected rate of return on an average stock is 11%, and the risk-free rate of return is 6.5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? (Work needed)
Stock R has a beta of 2.0, Stock S has a beta of 0.25, the required...
Stock R has a beta of 2.0, Stock S has a beta of 0.25, the required return on an average stock is 13%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. %
Stock R has a beta of 2.0, Stock S has a beta of 0.65, the required...
Stock R has a beta of 2.0, Stock S has a beta of 0.65, the required return on an average stock is 10%, and the risk-free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.
Stock R has a beta of 1.7, Stock S has a beta of 0.6, the expected...
Stock R has a beta of 1.7, Stock S has a beta of 0.6, the expected rate of return on an average stock is 11%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.
Stock R has a beta of 2.0, Stock S has a beta of 0.65, the required...
Stock R has a beta of 2.0, Stock S has a beta of 0.65, the required return on an average stock is 10%, and the risk-free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.   %
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT