A. You have $238 thousand to invest in a stock portfolio. Your choices are Stock

Question

A.

You have $238 thousand to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.84 percent, and Stock L, with an expected return of 10.68 percent. If your goal is to create a portfolio with an expected return of 12.15 percent, how much money will you invest in Stock H?

B.

A stock has a beta of 1.11, and an expected return of 10.87. If the risk free rate is 4.38 percent, what is the reward to risk ratio of the stock?

C.

A stock has a beta of 1.3 and an expected return of 13%. The risk free rate is 2% and the expected return on the market portfolio is 9%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM?

Enter answer in percents, accurate to two decimal places.

Explanation / Answer

A) Assume x% is been invested in H and the rest in L.

Expected return os the portfolio is :

x*14.84+(1-x)*10.68 = 12.15

x = 33.33%

= $ 84100.90 should be invested in Stock H.

B) Risk Reward ratio = Risk Premium / Beta

= (10.87-4.37)/1.11 = 5.855

c)According to CAPM Expected return = Risk free rate + Beta (Risk premium)

= 2+ 1.3* (9-2)

= 2 + 9.1 = 11.1

Expected return 13% is better by 1.9% compared to CAPM estimation.

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