1. Acne Corp. has a beta of 0.82. The risk-free rate of return is 4.25 percent a

ID: 2652260 • Letter: 1

Question

1. Acne Corp. has a beta of 0.82. The risk-free rate of return is 4.25 percent and the market rate of return is 14.60 percent. Find

a. The stock's required rate of return

b. The y intercept value (vertical axis) on the Security Market Line. (hint: zero beta on horizontal axis)

2. What is the expected (or required) return on this portfolio?

$13

3. What is the expected (or required) return on a portfolio that is equally weighted between stocks K and L given the following information?

Stock Expected
Return Number
of Shares Stock
Price A 12% 300 $28 B 7% 500 $10 C 15% 600

$13

1a. Required rate of return = Rf + (Rm - Rf) x Beta = 4.25 + (14.60 - 4.25) x 0.82 = 12.74%

1b. Y intercept value on Y-axis is nothing but just the value of Risk-free return. Thus, Y intercepr value is 4.25%

2. Expected return of portfolio = (12% x 300/1400) + (7% x 500/1400) + (15% x 600/1400) = 11.5%

3. Expected return of Stock K = (16 x 25%) + (12 x 75%) = 13%
Expected return of Stock L = (13 x 25%) + (8 x 75%) = 9.25%

Expected return of Portfolio = (13 + 9.25) x 0.5 = 11.125% or 11.13%

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