2. The only component of the CAPM equation that relates specifically to a compan
ID: 2803529 • Letter: 2
Question
2. The only component of the CAPM equation that relates specifically to a company is
a)bX
b)kM
c)kRF
d)(kM - kRF)
3. The CAPM asserts that the only company specific factor affecting required return is
a)market risk
b)the risk-free rate
c)investment risk
rd)isk aversion
4. A portfolio is characterized by the following
Stock
$'s invested
Expected Return
Beta
X
$2,000
15%
2
Y
$8,000
12%
1.6
Z
$2,000
8%
1.2
a)
Calculate the portfolio's expected return.
b)
Calculate the beta of the portfolio.
c)
If the return on the market is 10% and the risk-free rate is 3%, what is the required return on the portfolio?
Stock
$'s invested
Expected Return
Beta
X
$2,000
15%
2
Y
$8,000
12%
1.6
Z
$2,000
8%
1.2
Explanation / Answer
Answer 2)
option a) Beta is specific to company
Answer 3)
option d) risk aversion
Answer 4)
a) Expected return = weight of Stock x * return on stock x + weight of Stock y * return on stock y + weight of Stock z* return on stock z
Expected return = (2000/12000)* 15% + (8000/12000)*12%+ (2000/12000)*8% = 11.8333%
b) Portfolio Beta = Weight of stock x * beta of x +Weight of stock y * beta of y + Weight of stock z* beta of z
Portfolio Beta = 16.67%*2 + 66.67%*1.6 +16.67% * 1.2 = 1.60
c) Required return on the portfolio = Risk free rate + Porfolio beta * (Market return - risk free rate)
= 3% + 1.6 *(10%-3%) = 14.20%
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