Use Bank of America and Sprint in order to answer the following questions. 1. Wh

Question

Use Bank of America and Sprint in order to answer the following questions.

1. What are the betas listed for these companies? BAC = 1.92 and S = -1.355

2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio?

3. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance! Yahoos (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.

4. Compare the required return on these stocks calculated using CAPM in question #3 against their historical return over the last 52 weeks, found in the Yahoo!Finance Profile. Is there a difference between these returns? Is this a problem? Why is there a difference?

Explanation / Answer

b

Since, we invest equally in both Bank of America and Sprint, the proportion of each is 0.5

Beta of Portfolio = Weighted Average of Beta of Stocks invested
= 0.5*1.92 + 0.5*-1.355
= 0.2825

c.If you made an equal dollar investment in each stocks what would be the beta of your portfolio?

          The portfolio

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