Given the following information answer Q6-Q7 Expected Return 11 .03% 12.50% Beta

Question

Given the following information answer Q6-Q7 Expected Return 11 .03% 12.50% Beta 0.87 1.09 1.18 1.34 1.62 Stock 15.02% 17.07% 6. According to the CAPM, which stock is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent? (10pt.) 7. Suppose you hold a portfolio that consists of stock A. B. C. D, and E. In the portfolio, you insert 15% n stxk A, 20% in stick B, 10% in.tock C, 30% in stock D, and the rest in stock E. What is the beta of the porttolio" (Ipt.)

Explanation / Answer

Risk Free rate 3.20% Market return 11.76% CAPM return =Risk free rate+Beta*(Market return-risk free rate) Stock BETA CAPM return Given return Variance A 0.87 10.65% 11.03% -0.38% B 1.09 12.53% 12.50% 0.03% C 1.18 13.30% 13.21% 0.09% D 1.34 14.67% 15.02% -0.35% E 1.62 17.07% 17.07% 0.00% As we can see stock E is having zero variance so we can say that E is correctly priced Stock BETA Weight Beta* weight A 0.87 15% 0.1305 B 1.09 20% 0.218 C 1.18 10% 0.118 D 1.34 30% 0.402 E 1.62 25% 0.405 Total 1.2735 So portfolio beta will be 1.2735

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