U.S. Bancorp holds a press conference to announce a positive news event that was

Question

U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made the stock price increases $8 per share but then over the next hour the price continues to increases resulting in a total increase of $11. Given this information which of the following statements is correct? You hold the position in the following table. What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk free rate is 4 percent, what is the required return of the portfolio?

Explanation / Answer

1. This is an example of over reaction.

2. Required return of Advanced Micro Devices

Rf+?A*(Rm-Rf) =4+4.2(10-4)=29.2

Required Return of FEDEX Corp

Rf+?A*(Rm-Rf)=4+1.1(10-4)=10.6

Required return of Microsoft

Rf+?A*(Rm-Rf)=4+0.7(10-4)=9.3

Required return of sara lee corp

Rf+?A*(Rm-Rf)=4+0.5(10-4)=7

Beta Of Portfolio=200*10+50*100+30*150+15*200=14500

2000/14500*29..2%+5000/14500*10.6%+4500/14500*8.2%+3000/14500*7%

=.040+.036+.025+.0144=11.68%

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