Your portfolio has a beta of 1.27. The portfolio consists of 13 percent U.S. Tre

Question

Your portfolio has a beta of 1.27. The portfolio consists of 13 percent U.S. Treasury bills, 27 percent stock A, and 60 percent stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of stock B? The expected return on HiLo stock is 15.20 percent while the expected return on the market is 13.6 percent. The beta of HiLo is 1.43. What is the risk-free rate of return? The stock of Big Joe's has a beta of 1.50 and an expected return of 12.60 percent. The risk-free rate of return is 5.1 percent. What is the expected return on the market?

Explanation / Answer

Solution :

Answer 4 -

portfolio beta = stock 1 beta * % in portfolio + stock 2 beta * % in portfolio + stock 3 beta * % in portfolio

1.27 = (US bill beta assued risk free 0) 0 * 13% + 1.27 * 27% + 60% * x

x = 1.545

Answer 5 -

Expected Return = Risk free return + Beta of stock (Expected market return - Risk free return)

15.20 = x + 1.43 ( 13.60 - x)

- 4.248 = x - 1.43x

x = 9.88 percent

Answer 6 -

Expected Return = Risk free return + Beta of stock (Expected market return - Risk free return)

12.60 = 5.1 + 1.50 ( x - 5.1)

x = 10.10 percent

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