We Do Bankruptcies is a law firm that specializes in providing advice to firms i

Question

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It is prospers in recessions when other firms are struggling. Consequently, its beta is negative, minus .1. 1. If the interst rate on T-bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to CAPM? What is Expected return ______% 2. Suppose you invest 80% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Round your answer to 2 decimal places.) What is Portfolio beta _______?

Explanation / Answer

1. the expected return on the shares of the law firm = 4% +(-.1)*(14%-4%) =3.00% 2. beta of market = 1 beta of portfolio = 80%*1 + 20%*(-.1) =0.78

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