1.a) A stock has an expected return of 11.6 percent and a beta of 1.51, and the

Question

1.a) A stock has an expected return of 11.6 percent and a beta of 1.51, and the expected return on the market is 9.6 percent. What must the risk-free rate be? (Enter answer in percents, not in decimals.)

1.b) You have $284 thousand to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.66 percent, and Stock L, with an expected return of 10.65 percent. If your goal is to create a portfolio with an expected return of 12.08 percent, how much money will you invest in Stock H?

Explanation / Answer

(a)

According to the CAPM

Rs = Rf? + beta*(Rm? - Rf)

Rs? = 11.6%, beta = 1.51, Rm? = 9.6%

11.6% = Rf? + 1.51*(9.6% - Rf)

Rf? = 5.68%

(b)

14.66% * Q/284 + 10.65% * (284 - Q)/284 = 12.08%

Q = 101.28

Therefore, you should invest $101.28 thousand in Stock H

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