23) The risk-free rate is 3.4 percent and the expected return on the market is 1

Question

23) The risk-free rate is 3.4 percent and the expected return on the market is 10.8 percent. Stock A has a beta of 1.18. For a given year, stock A returned 13.6 percent while the market returned 11.8 percent. The systematic portion of the unexpected return was percent and the unsystematic portion was percent. A) 1.045; 0.207 B) 1.145; 0.126 C) 1.180; 0.288 D) 1.344; 1.443 E) 1.500; 1.449 24) What is the beta of a portfolio which consists of the following? SecurityS Invested Beta A | $| 5,00)(0.7 3,0001.30 S5,0001.0 D | $| 7,00)( 1.8 A) 1.01 B) 1.24 C) 1.26 D) 1.29 E) 1.32

Explanation / Answer

23)As per CAPM,

Expected return on stock =Risk free+(Market return-expected return)×Beta

Hence,Expected return=3.4+(10.8-3.4)×1.18=12.132%

Now,systematic portion of unexpected return=Beta×(Actual market return-expected market return)=1.18×(11.8-10.8)=1.18%

Now we know that,Actual stock return=Expected stock return+systematic portion+unsystematic portion of unexpected return

Hence,Unsystematic portion of unexpected return=13.6-12.132-1.18=0.288%

Hence correct answer is option(C)

24)Beta of portfolio=weighted average of beta of individual stocks=(5000÷20000)×.79+(3000÷20000)×1.36+(5000÷20000)×1.01+(7000÷20000)×1.89=1.32

Hence correct answer is option(E)

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