Using this information- answer the questons below. The beta of ITC is 1.004 and
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Question
Using this information- answer the questons below.
The beta of ITC is 1.004 and the Betal of Ranbaxy is 0.92.
I noticed that the 52 weeks high return from ITC is 89% and return of Ranbaxy is 164%.
If you assume the Rf is 8% (in India all the banks offer 8% and more on the deposits) now the expected return from ITC is = 8+1.004(5) =13.02 is the expected return from ITC and for Ranbaxy= 8+0.92(5)= 12.6%. There is a difference between these returns but it is not a problem as the required return and realized return are different, and it differs due to various reasons.
What's the beta of your portfolio, assuming you hold both stocks in equal proportion?
What's the actual return or appreciation of these 2 stocks over the past year? One can get that via the 1 yr chart, or by getting the price 1 year ago under Historical Prices, & compare that to today's price. The 52 week range only gives the price range over the past 52 weeks, and its peak may not necessarily be today's price.
Explanation / Answer
A. Beta of the portfolio is nothing but the weighted average of the Betas of the stock in the portfolio. Thus, Beta of the portfolio is
Beta = (0.5 x 1.004) + (0.5 x 0.92) = 0.962
B. When we look at the 1 year chart of ITC we will find that one year before price of ITC was Rs.345.90 and 1 year later price, i.e., today's price is Rs. 349.95. Thus, the appreciation in the stock of ITC is:
Appreciation in the stock of ITC in the past year = (349.95 - 345.90) / 345.90 = 1.17%
Similarly, the price of Ranbaxy one year before and now is Rs.466.15 and Rs.859.90.
Appreciation in the stock of Ranbaxy in the past year = (859.90 - 466.15) / 466.15 = 84.47%
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