7a. Using the above information, what is the portfolio beta? Beta= 1.51205 7b. U

Question

7a. Using the above information, what is the portfolio beta?

Beta= 1.51205

7b. Use the security market line equation to determine the return for 4ever Corp. 4ever Corp has a beta of 1.5. The risk-free rate of return is 4.5% and the market risk premium is 6.5%.

k = 14.25%

7c. 2morrow Inc has a beta of 2.0. If the return on the market is 9% and 2morrow’s return is 12.5%, what is the risk-free rate of return?

rf (hat) = 5.5%

Answers are provided in bold. Just not sure how to get to them. I know the first problem uses the chart above so I assumed the rest did since it was all #7 but not sure.

7d. The return for gnite Int’l is 5.6%. The risk free rate of return is 4.5% and gnite’s beta is 1.1. What is the return on the market?

rm (hat) = 5.5%

company market value expected return beta 4ever 75,000 4% 1.5 lol 100,000 12% .75 2morrow 200,000 8% 2.0 gnite 50,000 17% 1.1

Explanation / Answer

7a)

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

7b)

= 4.5%+1.5×6.5%

= 14.25%

7c)

12.5% = Rf+2×(9%-Rf)

Rf = 5.5%

7d)

5.6% = 4.5%+1.1×(Rm-4.5%)

Rm = 5.5%

company market value Weights in portfolio beta Weighted beta 4ever 75,000                           0.176 1.50 0.265 lol 100,000                           0.235 0.75 0.176 2morrow 200,000                           0.471 2.00 0.941 gnite 50,000                           0.118 1.10 0.129 425,000                           1.000 = 1.512

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