18. Keith Johnson has $100,000 invested in a 2-stock portfolio. $30,000 is inves

ID: 2664466 • Letter: 1

Question

18. Keith Johnson has $100,000 invested in a 2-stock portfolio. $30,000 is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs’ beta is 0.60. What is the portfolio's beta?

a. 0.60
b. 0.66
c. 0.74
d. 0.82
e. 0.90

19. Ritter Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is Ritter's required rate of return?

a. 11.36%
b. 11.65%
c. 11.95%
d. 12.25%
e. 12.55%

20. Inflation, recession, and high interest rates are economic events that are best characterized as being

a. systematic risk factors that can be diversified away.
b. company-specific risk factors that can be diversified away.
c. among the factors that are responsible for market risk.
d. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
e. irrelevant except to governmental authorities like the Federal Reserve.

Explanation / Answer

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18) its E.. heres how:-

A portfolio beta is the weighted average of the betas of individual securities in a portfolio.

In this case,

Company

Amount invested

Weight

Potts Manufacturing

30,000

(30,000/100,000)*100=30%

Stohs Corporation

70,000

(70,000/100,000)*100=70%

TOTAL

100,000

100%

Potts Manufacturing has a beta of 1.6 while Stohs has a beta of 0.6, so the portfolio beta is,

=(0.3*1.6)+(0.7*0.6)

=0.48+0.42

=0.9

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19) is C .. heres how:-

Ritter's required return is = 4.25 + 5.5X1.40 = 11.95%