You have a $52,000 portfolio consisting of Intel, GE, and Con Edison. You put $2

Question

You have a $52,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,800 in Intel, $12,800 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?    a. 0.807   b. 0.996   c. 1.364   d. 1.049

You consider buying a share of stock at a price of $12. The stock is expected to pay a dividend of $1.60 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $14. The stock's beta is 1.2, rf is 15%, and E[rm] = 25%. What is the stock's abnormal return?           a. 0%    b. 3%   c. 12%   d. 13%

61. Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.             a.$150    b. $200   c. $100   d. $50

Explanation / Answer

WEIGHT OF INVESTMENT IN INTEL

= $20800 / $52000

= 0.4 OR 40%

WEIGHT OF INVESTMENT GE

= $12800 / $52000

= 0.2462 OR 24.62%

WEIGHT OF INVESTMENT IN CON EDISON

= $18400 / $52000

= 0.3538 OR 35.38%

PORT FOLIO BETA

= 1.3 * 40% + 1 * 24.62% + 0.8 * 35.38%

= 1.05

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REQUIRED RETURN Ke

= Rf + BETA (Rm - Rf)

= 15% + 1.2 (25% - 15%)

= 15% + 12%

= 27%

ACTUAL RETURN

=[ $1.60 + ($14 - $12)] / $12

= 0.3 OR 30%

ABNORMAL RETURN

= 30% - 27%

= 3%

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REQUIRED RATE OF RETURN Ke

= Rf + BETA * (Rm - Rf)

= 5% + 0.5 (13% - 5%)

= 9%

INTRENSIC VALUE

= D1 / (Ke - GROWTH)

= $6 / (9% + 3%)

= $50

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