3. The risk-free rate of return is 4% and the market risk premium is 8%. What is

Question

3.      The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.8?

4.      Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a beta of .6, stock Y has a beta of 1.4, and stock Z has a beta of 1.2. What is the beta of your portfolio?

5. A firm is evaluating a proposal which has an initial investment of $60,000 and has cash flows of $16,000 per year for five years. Calculate the payback period of the project. If the firm’s maximum acceptable payback period is 3 years, should the firm accept the project?

Explanation / Answer

3) Expected return = risk free rate + market risk premium multiplied by stocks beta

= 4% + (1.8) * (8%)

= 18.4%

4) Beta portfolio = 0.3*0.6 + 0.5*1.4 + 0.2*1.2 = 1.12

5) Payback period = Initial investment / Annual Cash flow

= $60,000 / $16,000

= 3.75 years

The proposal cannot be accepted as payback period is greater than 3 years.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.