o Normal 1 No Spac.. Heading 1 Heading 2 Title Subtitle Su Styles QUESTION 46 I.
ID: 1176094 • Letter: O
Question
o Normal 1 No Spac.. Heading 1 Heading 2 Title Subtitle Su Styles QUESTION 46 I. For the next 3 questions suppose the following holds: The risk free rate is 6%, the market risk premium (-ERM-RF) is 8% 2. You invest $600 in Security A with a beta of 1.2 and $400 in Security 8 with beta of 1.6. What is the beta of this formed portfolio? c 1.15 1.32 1.36 ? 1.41 ? 1.52 I points QUESTION 47 1. Based on the CAPM, what is the required rate of return of your portfolio? 14.67% 15.12% 16.88% 17.23% ? 18.12% 1 points QUESTION 48 A share of stock sells for $100 today. It will pay a dividend of $10 per share at the end of the year Its beta is 1.6. What do investors expect the stock sell for at the end of the year? Assume that RF-796 and E(RM-1696 1. 104.9 109.6 ? 115.7 C 119.2Explanation / Answer
46)Total investment = 600+400=1000
Beta of portfolio = [1.2*600/1000]+[1.6*400/1000]
= .72+ .64
= 1.36
correct option is " C"
47)required rate = Rf+ [Market premium * beta]
= 6+ [8*1.36]
= 6+ 10.88
= 16.88%
correct option is " C"
48)cost of equity = 7+ [(16-7)*1.6]
= 7 + 14.4
= 21.4%
price today =D1/(Rs-g)
100=10 /(.214-g)
.214-g = 10/100
.214 - .10= g
g = .114 or 11.4%
D2 =D1(1+g)
= 10(1+.114)
= 11.14
price in one year= 11.14/(.214-.114)
= 11.14 /.10
= $ 111.4
correct option is "C"
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