Problem Solving 1. Assume that you have a portfolio consisting the following sto

Question

Problem Solving 1. Assume that you have a portfolio consisting the following stocks. Stocks AAPL (Apple Inc WFC (Wells Fargo)1.45 XOM (Exxon Mobil)0.30 $ investment $400,000 $400,000 $200,000 Beta 1.50 If the risk-free rate ofreturn is 3.06% and market risk premium is 6%. What is your portfolio beta? What is your portfolio expected return according to CAPM? 2. Assume that you have a portfolio consisting of 40% A and 60% B. What is your portfolio expected return according to the three states of economy? E(R Stock A Stock B E(Ra) -20% 15% 35% E(Rb) 30% 15% -10% State (i) Recession 0.25 0.50 0.25 1.00 Neutral Boom 3. You are given the following information concerning Parrothead Enterprises. Calculate the WACC for Parrothead Enterprises

Explanation / Answer

portfolio beta= weighted average of individual beta of stocks
wt of AAPL=400000/(400000+400000+200000)=40%
wt of WFC=400000/(400000+400000+200000)=40%
Wt of XOM=200000/(400000+400000+200000)=20%
Portfolio Beta=(40%*1.5)+(40%*1.45)+(20%*0.3)
=1.24
According to capm model
Expected return=Risk free+(beta* market risk premium)
=3.06%+(1.24*6%)
=10.50%

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