Stock A has an expected return of 10% and a standard deviation of 20%. Stock B h

Question

Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM - rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested is Stock A and 50% invested in Stock B. The returns of Stock A and stock B are independent of one another, i.e., the correlation coefficient between them is zero. What is the beta for stock A? Jill Angel holds a $200, 000 portfolio consisting of the following stocks. The portfolio's beta is 0.875. If Jill replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be? Mikkelson Corporation's stock a required return of 13.15% last year, when the risk-free was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return?

Explanation / Answer

1. Expected return on stock A = 10%

Rf + Beta (Rm-Rf) = 10%

5% + Beta x 6% = 10%

Beta = 0.833

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