Question 1 You have invested in stocks J and M. From the following information,

Question

Question 1

You have invested in stocks J and M. From the following information, determine the beta for your portfolio.

Expected

Amount of

Return

Investment

Beta

Stock J

0.08

$100,000

1.33

Stock M

0.10

$300,000

0.81

Question 2

Frazier Manufacturing paid a dividend last year of
$2, which is expected to grow at a constant rate of 5%. Frazier has a beta of
1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the
value of Frazier

Expected

Amount of

Return

Investment

Beta

Stock J

0.08

$100,000

1.33

Stock M

0.10

$300,000

0.81

Explanation / Answer

1) Beta(P) = ( 100000/(100000+300000) )*1.33 + ( 300000/(100000+300000) )*0.81 = 0.94

2)r = RFR + Beta*(MR-RFR) = 0.04 + 1.3*(0.11-0.04) = 13.1%

P = D(0)*(1+g)/(r-g) = 2*1.05/(0.131-0.05) = $25.92

3)E(r) = Sum(F(stock)*E(r of stock) = 0.3*0.1 + 0.4*0.1 + 0.3*0.02 = 0.076

4)Correlation Coefficient = Cov(Willow,Sky)/(Sd(Willow)*Sd(Sky)) = 0.0710/(0.1510*0.1370)^(1/2) = 0.49

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