We Do Bankruptcies is a law firm that specializes in providing advice to firms i
ID: 2749969 • 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, .3.
If the interest rate on Treasury bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to the CAPM? (in %)
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? (Round your answer to 2 decimal places.)
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, .3.
If the interest rate on Treasury bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to the CAPM? (in %)
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? (Round your answer to 2 decimal places.)
Explanation / Answer
Expected return = risk free rate + beta*market risk premium
= 4% + ((-.3*(14%-4%))
= .04 - .03 = 1%
expected return on the shares of the law firm according to the CAPM is 1%
Beta of the portfolio = (0.7*1) + (0.3*-0.3) = .61
we have used market beta as 1 and equity beta as -.3 and their respective weights.
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