1. A stock has an expected return of 14.3 percent, the risk-free rate is 5.55 pe
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Question
1.
A stock has an expected return of 14.3 percent, the risk-free rate is 5.55 percent, and the market risk premium is 7 percent.
2,
You own a portfolio that is 17 percent invested in Stock X, 32 percent in Stock Y, and 51 percent in Stock Z. The expected returns on these three stocks are 12 percent, 15 percent, and 17 percent, respectively.
What is the expected return on the portfolio? ( Round to two decimal places)
3.
A stock has a beta of 1.13, the expected return on the market is 10.7 percent, and the risk-free rate is 4.6 percent.
What must the expected return on this stock be? (2 decimal places)
A stock has an expected return of 14.3 percent, the risk-free rate is 5.55 percent, and the market risk premium is 7 percent.
Explanation / Answer
1.A stock has an expected return of 14.3 percent, the risk-free rate is 5.55 percent, and the market risk premium is 7 percent.
Required:What must the beta of this stock be? (Round to three decimal places)
As per CAPM
Expected return on this stock = Rf +(RM-Rf)*Beta
14.3 = 5.55 + 7*Beta
Beta = (14.3- 5.55)/7
Beta = 1.25
2,You own a portfolio that is 17 percent invested in Stock X, 32 percent in Stock Y, and 51 percent in Stock Z. The expected returns on these three stocks are 12 percent, 15 percent, and 17 percent, respectively.
Required:What is the expected return on the portfolio? ( Round to two decimal places)
Expected return on the portfolio = Weight of Stock x * Expected return on Stock X + Weight of Stock y * Expected return on Stock y + Weight of Stock z * Expected return on Stock z
Expected return on the portfolio = 17%*12 + 32%*15 + 51%*17
Expected return on the portfolio = 15.51%
3.A stock has a beta of 1.13, the expected return on the market is 10.7 percent, and the risk-free rate is 4.6 percent.
Required: What must the expected return on this stock be? (2 decimal places)
As per CAPM
Expected return on this stock = Rf +(RM-Rf)*Beta
Expected return on this stock = 4.6 + (10.7-4.6)*1.13
Expected return on this stock = 11.49%
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