Q 1- Currently, risk-free rate is 1% and the market risk premium is 3%. Given th
ID: 2717357 • Letter: Q
Question
Q 1- Currently, risk-free rate is 1% and the market risk premium is 3%. Given this information, which of the following statements is CORRECT?
If a stock's beta doubles, its required return must also double.
Q 2- NexCell Inc.'s stock has a 45% chance of producing a 10% return, a 30% chance of producing a 20% return, and a 25% chance of producing a 20% return. What is the firm's expected rate of return?
10.00%
Q-3 Eccel has $100,000 invested in a 2-stock portfolio. $40,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.25 and Y's beta is 0.70. What is the portfolio's beta?
An index fund with beta = 1.0 should have a required return of 4%.Explanation / Answer
1)correct option is "A" = An index fund with beta = 1.0 should have a required return of 4%.
[expected return = Rf + [beta*market premium]
= 1 + [1*3]
= 1+3 = 4%
2)correct option is "C" - 5.5%.
[return of portfolio = (10*.45)+(20*.30)+(-20*.25) ]
= [4.5 +6 - 5]
= 5.5
3)correct option is "D"
[Beta = 1.25*40000/100000 + .7*60000/100000]
= .50+ .42
= .92
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