A. You own a portfolio equally invested in a risk-free asset and two stocks. If

Question

A. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.63 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? Input area: Weight of risk-free Weight of Stock A Weight of Stock B Beta of risk-free Beta of Stock A Beta of Portfolio 33.33% 33.33% 33.33% 0.00 1.63 1.00 Output area Beta of Stock B. A stock has an expected return of 11.4 percent, the risk-free rate is 3.7 percent, and the market risk premium is 7.1 percent. What must the beta of this stock be? Input area: Stock E(R) Risk-free return Market risk premium 1 1.40% 370% 7.10% Output area Stock beta

Explanation / Answer

1.

Beta of risk free assets=0

Beta of portfolio=respective betas*Respective weights

1=(1.63/3)+(Beta of stock/3)+(0/3)

1=0.5433+Beta of stock/3

Hence Beta of stock=(1-0.5433)*3

=1.37

2.

Stock return=Risk free rate+Beta*Market risk premium

11.4=3.7+Beta*7.1

Hence Beta=(11.4-3.7)/7.1

=1.08(Approx).

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