1. Karl Korporation has decided to take a look at its portfolio and examine the

Question

1. Karl Korporation has decided to take a look at its portfolio and examine the current risk. Currently, Karl Korp’s portfolio contains 3 stocks, has a beta of 1.6, an expected return of 14.2% and a total value of $2million. The expected market return is 9.6%. Given the information below, determine the Beta and expected return of Stock C. What is the current risk free rate?

Stock A

Stock B

Stock C

$ Amount

$600,000

$750,000

Beta

1.7

1.2

Expected Return

15%

11%

Stock A

Stock B

Stock C

$ Amount

$600,000

$750,000

Beta

1.7

1.2

Expected Return

15%

11%

Explanation / Answer

Hi,

Please find the answer as follows:

Amount invested in Stock C = 2000000 - 600000 - 750000 = 650000

Expected Return on Stock C

14.2 = 15*600000/2000000 + 11*750000/2000000 + x*650000/2000000

On calculation we get = 17.15%

Beta of Stock C

1.6 = 1.7*600000/2000000 + 1.2*750000/2000000 + x*650000/2000000

On calculation we get = 1.97

Current Risk Free Rate

14.2 = Rf + 1.6*(9.6 - Rf)

14.2 = Rf + 15.36 - 1.6Rf = 1.93%

Thanks.

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