If the risk-free rate of return is 4%, what does the CAPM say the return will be

ID: 2789652 • Letter: I

Question

If the risk-free rate of return is 4%, what does the CAPM say the return will be on a stock with a beta of 1.1? Assume the market risk premium is 6%.

11.0%

At one point in time recently Verizon stock was priced at $50 per share and Simon Property Group stock was priced at $150 per share. At that time, suppose you assembled a portfolio consisting of 300 shares of Verizon and 100 shares of Simon. What was the weight of the Simon stock?

.75

Suppose you have a portfolio which is equally invested in three securities: two stocks and a risk-free asset. The riskiness of the portfolio is the same as the total market. The beta of one of the stocks is 1.65. What is the beta of the other stock?

If the risk-free rate of return is 4%, what does the CAPM say the return will be on a stock with a beta of 1.1? Assume the market risk premium is 6%.

10.0% 6.2% 6.6% 10.6%

11.0%

.20 .50 .3333 .25

.75

1.00 0.825 1.35 0.35 0.65

Explanation / Answer

a.Required return=risk free rate+Beta*Market risk premium

=4+(1.1*6)

=10.6%

Total value o Verizon=(50*300)=15000

Total value o Simon=(150*100)=$15000

Total-=$30000

Hence weight of Simon stock=(15000/30000)

=0.5

Beta of portfolio=Respective betas*Respectie weights

1=(1.65/3)+(1/3*Beta of stock)+0[Beta of portfolio=1;Beta of risk free asset=0]

1=0.55+(1/3*Beta of stock)

Hence Beta of stock=(1-0.55)*3

=1.35

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If the risk-free rate of return is 4%, what does the CAPM say the return will be

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