17 Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected r

Question

17 Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of xpected return on Stock A if the percent. What is thee tocks have equal reward-to-risk premiums? A 12.12 percent 15.07 percent C 16.34 percent 16.89 percent 17.78 percent D. You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolioi? 18. Number Price perExpected Stock lof Shares share t-Return - 8, 90% 450 575 A 9.97 percent B. 10.86 percent C. 11.23 percent D. 12.09 percent E. 14.20 percent 19. Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B? Rate of Return | | Probability State of Economy of State | Stock A Stock B | Stock C Recession Normal Boom 0.05 0.85 0.1 7.8% 9.1% 11.8% 23.6% 15.4% -12.3% 18.4% 13.7% 6.4% | 11.97 percent 12.94 percent 13.33 percent 13.84 percent 14.42 percent

Explanation / Answer

17.

for Stock B

Risk free rate = 4.50%

Expected return = 13.2%

Beta = 1.08

Risk premium is calculated below using CAPM model:

Expected return = Risk free rate + Risk premium × Beta

               13.2% = 4.50% + Risk Premium × 1.08

             8.70% = Risk Premium × 1.08

    Risk premium = 8.06%

Hence, Risk premium is 8.06%.

Now, Expected return of stock A is calculated below:

Expected rate of return = Risk free rate + Risk Premium × Beta

                                      = 4.50% + (8.06% × 1.47)

                                      = 4.50% + 11.84%

                                      = 16.34%

Hence, expected rate of return of stock A is 16.34%.

Option (C) is correct answer.

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