You have $800,000 to invest. Calculate the betas for stock A and stock B. Graphi

Question

You have $800,000 to invest. Calculate the betas for stock A and stock B. Graphically depict the security market line. Calculate the required rates of return for the two stocks Assume that an investor puts 70 percent in the market portfolio and 30 percent in the risk-free asset. What is the expected return and standard deviation of this portfolio? Assume that you are forming a portfolio by investing $200,000 in Stock A and the balance of the $800,000 in Stock B. Calculate the expected return and standard deviation of this portfolio Assume that you are forming a portfolio by investing $300,000 in Stock A, $300,000 in Stock B and the balance of the $800,000 in the risk free asset. Calculate the expected return and standard deviation of this portfolio. Compare your answers to (e) and (f) and recommend which portfolio you would prefer giving your rationale for doing so.

Explanation / Answer

DUE to Time constraint, i have done so much .

1 Beta of stock = Std. deviation of stock A/ Std deviation of market Stock A= 1.2 Stock B= 1.4 2 Stock Beta STd Dev. Risk Free rate Market Return CAPM= Rf+(RM-RF)*Beta A 1.2 0.12 0.04 0.12 13.60% B 1.4 0.14 0.04 0.12 15.20% 3 CAPM= Rf+(RM-RF)*Beta stock A 13.60% stock B 15.20% 4 Expected Return= 0.12*70% + 0.04*30% 9.60% Std dev-= #DIV/0! 5 Expected Return= 14.80% Stock A 0.25 Stock B 0.75 Std dev-= 6 Expected Return= 1.00% Stock A 0.375 Stock B 0.375 Risk Free 0.25

DUE to Time constraint, i have done so much .

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