Suppose that stock in Widgets, Inc. has a beta of 0.75, while stock in National

Question

Suppose that stock in Widgets, Inc. has a beta of 0.75, while stock in National Bank has a beta of 1.5. 8. If stock in Widgets, Inc. is expected to earn a risk premium of 4%, then according to the CAPM, what must be the expected risk premium of the market portfolio? What must be the expected risk premium for stock in National Bank, according to the CAPM? a. b. According to the CAPM, what must be the risk premium of a portfolio that consists of 1/4 shares of Widgets, Inc. and 3/4 shares of National Bank? What must be the portfolio's beta? c.

Explanation / Answer

a.

expected risk premium for market portfolio

=4%/0.75

=5.33%

b.

expected risk premium for national bank=1.5*5.33%=8.00%

c.

portfolio beta=(1/4)*0.75+(3/4)*1.50=1.3125 or 1.31

portfolio risk premium=1.3125*5.33%=7.00%

the above is the answer

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