1. Stock Y has a beta of 1.05 and an expected return of 13.10 percent. Stock Z h

Question

1. Stock Y has a beta of 1.05 and an expected return of 13.10 percent. Stock Z has a beta of 0.70 and an expected return of 7 percent. If the risk-free rate is 5.0 percent and the market risk premium is 7.4 percent, what are the reward-to-risk ratios of Y and Z? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

2.You own 400 shares of Stock A at a price of $50 per share, 290 shares of Stock B at $75 per share, and 700 shares of Stock C at $27 per share. The betas for the stocks are 0.6, 1.2, and 0.5, respectively. What is the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

3.A stock has an expected return of 13.2 percent, a beta of 1.40, and the return on the market is 10.10 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Ans. 1 Stock Y, Stock Z,

Beta=1.05, expected return= 13.10 % Beta=.70, Expected Return=7%

Risk Free Return= 5%, Market Risk Premium=7.4%

Required Return= Risk Free Return + Beta*market risk Premium

Y, 5% + 1.05*7.4% =12.77% Z, 5%+.70*7.4% =10.18%

Reward to Risk Ratio =Expected Return -Required Return/Beta

Y, 13.10-12.77 /1.05*100 = 31.42% Z, 7-10.18 /.7 *100= -454.2%

Ans. 2 As portfolio Beta is Weighted Average Beta so,

Portfolio Beta= BetaA*Weight of A +BetaB* weight of B +BetaC* weight of C

= 0.6*(400* 50) /(400*50 +290*75 +700*27) +1.2* (290*75)/(400*50 +290*75 +700*27) +0.5* (700*27)/(400*50 +290*75 +700*27)

= 0.7840*100

=78.40%

Ans. 3 Expected Return= risk free return + beta* (market return- risk free return)

13.20% = Rf + 1.40* (10.10%- Rf)

Rf =17.40%

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