Stock Expected Return (rs) Beta A 14.90% 1.70 B 8.25% 0.75 C 11.40% 1.20 D 6.50%

Question

Stock Expected Return (rs) Beta

A 14.90% 1.70

B 8.25% 0.75

C 11.40% 1.20

D 6.50% 0.50

a. What is the portfolio’s expected return?

b. What is the portfolio’s beta risk? Is it more or less risky than the market?

The investor is not comfortable with holding a portfolio that has a risk not equal to that of the market. She is thinking about purchasing stock E in order to change the risk of the portfolio.

c. What should the beta of Stock E be in order to make the portfolio have market risk? Assume all stocks have the same weight in the new portfolio.

d. According to the CAPM, what is E’s expected return if the risk-free rate is 3% and the market risk premium (RPM) is 7%?

e. What will be the expected return of the portfolio with E included?

Explanation / Answer

Stock Expected Return (rs) Beta A 14.90% 1.70 B 8.25% 0.75 C 11.40% 1.20 D 6.50%

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