Company:AAA- Return6.50%, Shares200, Price54 Company:Axe- Retrun7.8% Shares100 P

Question

Company:AAA- Return6.50%, Shares200, Price54 Company:Axe- Retrun7.8% Shares100 Price120 Company:BR Co.- Return11% Shares400, Price30 Company: Basil- Return12.7%, Shares500, Price450 Company: Temple- Return20.5%, Shares300, Price100 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

Company Return shares Price Portfolio value share Return A B C D E=C*D F=E/289800 G=F*B AAA 6.50% 200 54 10800 0.037267081 0.002422 Axe 7.80% 100 120 12000 0.041407867 0.00323 BR Co. 11% 400 30 12000 0.041407867 0.004555 Basil 12.70% 500 450 225000 0.776397516 0.098602 Temple 20.50% 300 100 30000 0.103519669 0.021222 1500 289800 13.00% Return on portfolio CAPM Rf+b(Rmp) 13% = 2%+b(5.5%) b 11%/5.5% b 2 Beta Company Return shares Price Portfolio value share Return A B C D E=C*D F=E/289800 G=F*B AAA 6.50% 200 54 10800 0.037267081 0.002422 Axe 7.80% 100 120 12000 0.041407867 0.00323 BR Co. 11% 400 30 12000 0.041407867 0.004555 Basil 12.70% 500 450 225000 0.776397516 0.098602 New 8.60% 600 50 30000 0.103519669 0.008903 1800 289800 11.77% New Return By CAPm Return on new stock 2%+b(5.5%) 8.60% New Beta 9.77%/5.5% 1.78

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