Company Return Shares Price AAA 6.50% 200 54 Axe 7.80% 100 120 BR Co. 11.00% 400
ID: 2722814 • Letter: C
Question
Company Return Shares Price AAA 6.50% 200 54 Axe 7.80% 100 120 BR Co. 11.00% 400 30 Basil, Inc 12.65% 500 450 Temple 20.50% 300 100 If the risk premium on the market is 5.5% and the risk-free rate is 2.00% What is the return on your portfolio? What is the Beta of the portfolio? If you decide to sell your Temple Stock and replace it with a stock (trading at $50 per share; using the entire proceeds to buy the new shares) that has a Beta of 1.20, what would the beta of your portfolio be and what is its new expected return on your portfolio?
Explanation / Answer
Details Company Return No of shares Price per share Market value % weight Market Value Value weighted Return% AAA 6.50% 200 54 10,800 3.73% 0.2% Axe 7.80% 100 120 12,000 4.14% 0.3% BR co 11.00% 400 30 12,000 4.14% 0.5% Basil Inc. 12.65% 500 450 225,000 77.64% 9.8% Temple 20.50% 300 100 30,000 10.35% 2.1% Total 289,800 100.00% 12.96% So Return on the portfolio= 12.96% Risk free rate =2% Marker Risk premium =5.5%=Rpm Assume the beta =b As per CAPM , Rs=Rf+Rpm*beta 12.96%=2%+5.5%*b b=1.993 So Portfolio beta =1.993 When the Temple stock is replaced: beta of new stock=1.2 So Return of new stock= 2%+5.5%*1.2 = 8.60% So return on new stock=8.6% Revised situation Company Return No of shares Price per share Market value % weight Market Value Value weighted Return% AAA 6.50% 200 54 10,800 3.73% 0.2% Axe 7.80% 100 120 12,000 4.14% 0.3% BR co 11.00% 400 30 12,000 4.14% 0.5% Basil Inc. 12.65% 500 450 225,000 77.64% 9.8% New stock 8.60% 600 50 30,000 10.35% 0.9% 289,800 100.00% 11.73% So Return on the revised portfolio= 11.73% Assume the beta is b So , As per CAPM: 11.73%=2%+5.5%*b b=1.769 So revised portfolio beta =1.769
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