1a.The return for the market during the next period is expected to be 16 percent

Question

1a.The return for the market during the next period is expected to be 16 percent; the risk-free rate is 10 percent. Calculate the required rate of return for Megan Cavanaugh, Inc. with a beta of 1.5.

b. The ________ the distribution of possible returns________ is the risk of an investment

c. A stock with a beta greater than one has returns that are __________ volatile than the market and a stock with a beta of less than one exhibits returns which are ____________ volatile than those of the market portfolio.

d. If Stormy holds a portfolio made up of the following stocks:

                               Investment Value         Beta

Stock A                     $2,000                       1.5

Stock B                     $5,000                       1.2

Stock C                     $3,000                       0.8

What is the beta of the portfolio?

e.

Winnder Li is considering investing in Ford Motor Company. Which of the followingare examples of diversifiable risk?

a. Risk resulting from possibility of a stock market crash.

b. Risk resulting from uncertainty regarding a possiblestrike against Ford.

c. Risk resulting from an expensive recall of a Ford product.

d. Risk resulting from interest rates decreasing.

Explanation / Answer

Using CAPM

Return on Market = 16%

Risk Free Rate = 10%

Beta = 1.5

Required Rate of Return = 10% + 1.5 * (16% - 10%)

Required Rate of Return = 19%

Part C

A stock with a beta greater than one has returns that are more volatile than the market and a stock with a beta of less than one exhibits returns which are less volatile than those of the market portfolio

Part D

Beta of the portfolio = 2,000/ (2,000 + 5,000 + 3,000) * 1.5 + 5,000/ (2,000 + 5,000 + 3,000) * 1.2 + 3,000/ (2,000 + 5,000 + 3,000) * 0.8

Beta of the portfolio = 0.30 + 0.60 + 0.24

Beta of the portfolio = 1.14

Part E

Answers are option b and c

Risk resulting from uncertainty regarding a possible strike against Ford and Risk resulting from an expensive recall of a Ford product.

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