You invest 16 percent im a stock remainder of your portfolio is in cash What is

Question

You invest 16 percent im a stock remainder of your portfolio is in cash What is your portfolio beta? 2.45 beta of 0 5 and 67 percent in a stock with a beta of 1.7. The QUESTION 11 0.64 points Save Answer AM Co has a beta of 06 and an expected return of 7.8 percent. PM Co has a beta of 1.5 and an expected return of 10.4 percent. Assume both securities are priced correctly. What is the market risk premium? QUESTION 12 0.64 points Save Answer AM Co has a beta of 0.9 and an expected return of 69 percent. PM Co has a beta of 1.9 and an expected return of 10 6 percent. Assume both securities are priced correctly. What is the risk-free rate? QUESTION 13 0.64 points Save Answer Copy of AM Co has a beta of 0.6 and an expected return of 5.2 percent. PM Co has a beta of 1.6 and an expected return of 10.2 percent. Assume both securities are priced correctly. What is the expected return on the market?

Explanation / Answer

Answer 11)

Expected return = risk free rate + Beta * (Market risk premium)

Equation 1 (For AM Co.)

7.8 = rf + 0.6 (MRP)

Equation 2 (For PM Co.)

10.4 =rf +1.5 (MRP)

Subtracting equaton 1 from 2

10.4-7.8 = rf-rf + (1.5-0.6) MRP

2.6 = 0.9 MRP

MRP = 2.6/0.9 = 2.888

Answer 12)

Using the same equation as above

Expected return = risk free rate + Beta * (Market risk premium)

Equation 1 (For AM Co.)

6.9 = rf + 0.9 (MRP)

Equation 2 (For PM Co.)

10.6 =rf +1.9 (MRP)

Subtracting equaton 1 from 2

10.6-6.9 = rf-rf + (1.9-0.9) MRP

3.7 = 1 MRP

MRP = 3.7/1 = 3.7

Putting the value of MRP in equation 1 to get rf i.e the risk free rate

6.9 = rf +0.9*3.7

rf =6.9 - 3.33 = 3.57%

Answer 13)

Expected return = risk free rate + Beta * (Market risk premium)

Equation 1 (For AM Co.)

5.2 = rf + 0.6 (MRP)

Equation 2 (For PM Co.)

10.2 =rf +1.6 (MRP)

Subtracting equaton 1 from 2

10.2-5.2 = rf-rf + (1.6-0.6) MRP

5 = 1 MRP

MRP = 5/1 = 5

Putting the value of MRP in equation 1 to get risk free rate

5.2 = rf + 0.6*5

5.2 = rf + 3

rf = 5.2 -3 = 2.2%

Now,

MRP = Market return - Risk free rate

5 = Market return - 2.2%

5+2.2 = Market return

Market return = 7.2%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.