1) If the beta of Microsoft is 1.11, risk-free rate is 3% and the market risk pr
ID: 2696375 • Letter: 1
Question
1) If the beta of Microsoft is 1.11, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft.
2)If the standard deviation of returns of the market is 0.1 and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio:
3)Which statements about beta as a measure of risk and variance as a measure of risk are correct?
a)In a well-diversified portfolio, unique risks tend to cancel each other out and only the market risk is remaining.
b)Beta measures the sensitivity of the security returns to changes in market returns.
c)The market portfolio has a beta of one.
d) Total risk has both unique risk and market risk.
e)Variance measures the total risk of a security and is a measure of stand-alone risk.
f)Beta is a measure of market risk and is useful in the context of a well-diversified portfolio.
Explanation / Answer
a. Expected return of Microsoft=Risk free asset +market risk premium * beta = 3+8*1.11 =11.88% b.standard deviation of portfolio= beta of well deversified portfolio * standard deviation of returnsof themarket = 1.5 * .1= .15 or 15 % c.All statements are correct.Related Questions
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