We Do Bankruptcies is a law firm that specializes in providing advice to firms i
ID: 2734971 • Letter: W
Question
We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, .2.
a. If the interest rate on Treasury bills is 5% and the expected return on the market portfolio is 20%, what is the expected return on the shares of the law firm according to the CAPM?
Suppose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio?
b.Suppose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio?
Explanation / Answer
a) Beta, B -0.2 Return on Market, Rm 20% Risk Free Rate, Rf 5.00% Ke = Rf+ B(Rm-Rf) Ke = 5% + -.2(20%-5%) Ke = 5% -3% ke=2% b) Beta of Market is 1.00 Beta of portfolio = .70 *1 + .30*-.2 Beta of portfolio = .70 - .06 Beta of portfolio = .64
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