Questions and Problems sack Betas (L03, CFA) A stock has an ex 3.5 percent 2 per
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Questions and Problems sack Betas (L03, CFA) A stock has an ex 3.5 percent 2 percent, the risk-free ratei risk premium is 7.5 percent. What must the beta of this stock be? and the market Returms (L.o3, CFAI) A stock has an expected ret turn of 8.0 percent, its beta is 60 berisd-fre ate i 3 percent. What must the expected return on the market be? return on the market is 10 percent. What must the risk-free rate be? 2 Market Rates (LO3, CFAI) A stock has an expected return of 12 percent, a beta of 1.4, and the expected Market Risk Premium (L.O3, CFAI) A stock has a beta of.8 and an expected return of nercent. If the risk-free rate is 4.5 percent, what is the market risk premium? .Portiolio Betas (L04, CFA2) You own a stock portfolio invested 10 percent in Stock Q, 25 percent in Stock R, 50 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are 1.4,.6, 1.5, and.9, respectively. What is the portfolio beta? . Portfolio Betas (LO4, CFAI) You own 400 shares of Stock A at a price of $60 per share, 500 shares of Stock B at $85 per share, and 900 shares of Stock C at $25 per share. The betas for the stocks are.8, 1.2, and.7, respectively. What is the beta of your portfolio? 7. Stock Betas (LO4, CFAI) 8. Expected Returns (L.O3, CFA2) A stock has a beta of.85, the expected return on the market is 9. CAPM and Stock Price (.O3, CFA4) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? Il percent, and the risk-free rate is 3 percent. What must the expected return on this stock be? A share of stock sells for $35 today. The beta of the rock is 1.2, and the expected return on the market is 12 percent. The stock is expected to pay a one year? dividend of S.80 in one year. If the risk-free rate is 5.5 percent, what should the share price be in 10. Portfolio We ghts (L.04, CFA2) A stock has a beta of 9 and an espected returm of 9 percent. A risk-free asset currently earns 4 percent. a. What b. If t is the expected return on a portfolio that is equally invested in the two assets? a portfolio of the two assets has a beta of 5, what are the portfolio weights? a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain 11. Portfolio Risk and Return (L.O3, CFAI) Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table for portolios of Ass W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns against the betas. What is the slope of the line that results ons Percentage of Portfolio in Asset W Portfolic Expected Return Portfolio Beta 09%Explanation / Answer
6) Portfolio beta is the weighted average of the beta of the component securities, the weights being the proportion which the amount invested in each security bears to the total invesment in the portoflio. Stock Amount invested Proportion to total or weight Beta of the stock Weighted average A $ 24,000 0.27 0.8 0.22 B $ 42,500 0.48 1.2 0.57 C $ 22,500 0.25 0.7 0.18 $ 89,000 0.97 Weighted average beta = 0.97 9) The required return as per CAPM = 5.5+1.2*(12.0-5.5) = 13.30 For finding out the share price 1 year from now, the following equation can be used: P0 = (D1+P1)/(1+r) Where P1 = Price one year from now P0 = Current price r = required return on the stock D1= Next expected dividend Assigning available values, we have 35 = (0.8+P1)/1.133 P1 = 35*1.133-0.80 = $38.86
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