Question 14 A portfolio contains 161 shares of Stock A that sell for $42 each, 3

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Question 14

A portfolio contains 161 shares of Stock A that sell for $42 each, 306 shares of Stock B that sell for $95 each and 55 shares of Stock C that sell for $61 each. What is the portfolio expected return if the expected returns on these stocks is 14.9%, 11.1%, and 7.9% respectively?

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 12.345% then enter as 12.35 in the answer box.

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Question 15

The common stock of Detroit Engines has a beta of 1.54 and expected returns of 14.54 percent. The expected return on the market is 3.31 percent. What is the risk-free rate?

Hint: Use the CAPM equation to get the answer.

Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box.

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Question 16

Suppose your portfolio consists of Stock A and Stock B. Stock A has an expected return of 18.5% and Stock B has an expected return of 4.2%. If your goal is to create a portfolio with an expected return of 12.6%, what is your weight in Stock B?

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 12.345% then enter as 12.35 in the answer box.

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Question 17

You want a portfolio as risky as the market. Given the information below, compute the weight of the risk-free asset.

Enter your answer in percentages, rounded off to two decimal points. Do not enter % in the answer box.

Explanation / Answer

Question 14

A portfolio contains 161 shares of Stock A that sell for $42 each, 306 shares of Stock B that sell for $95 each and 55 shares of Stock C that sell for $61 each. What is the portfolio expected return if the expected returns on these stocks is 14.9%, 11.1%, and 7.9% respectively?

Expected return=(161*42*14.9%+306*95*11.1%+55*61*7.9%)/(161*42+306*95+55*61)=11.4817%

Question 15

The common stock of Detroit Engines has a beta of 1.54 and expected returns of 14.54 percent. The expected return on the market is 3.31 percent. What is the risk-free rate?

Case 1: Given data is correct

Expected return according to CAPM=risk free rate+beta*(market return-risk free rate)

=>14.54%=risk free rate+1.54*(3.31%-risk free rate)

=>risk free rate=-17.486%

Case 2: Assuming typo of market return. It should be 13.31% and not 3.31%

Expected return according to CAPM=risk free rate+beta*(market return-risk free rate)

=>14.54%=risk free rate+1.54*(13.31%-risk free rate)

=>risk free rate=11.03%

Question 16

Suppose your portfolio consists of Stock A and Stock B. Stock A has an expected return of 18.5% and Stock B has an expected return of 4.2%. If your goal is to create a portfolio with an expected return of 12.6%, what is your weight in Stock B?

Let weight of Stock B be w and weight of Stock A be 1-w

Hence, returns of portfolio=w*4.2%+(1-w)*18.5%

=>12.6%=w*4.2%+(1-w)*18.5%

=>w=0.412587 or 41.26%

Question 17

You want a portfolio as risky as the market. Given the information below, compute the weight of the risk-free asset.

Asset Investment Beta

Stock A 40.00% 1.4

Stock B 25.00% 0.9

Stock C ? 2.25

Risk-free asset ? ?

Let weight of Stock C in portfolio be w and weight of risk free asset be 1-w-0.4-0.25=0.35-w

Beta of risk free asset is zero and beta of market is 1

For portfolio to be as risky as market beta of portfolio must be equal to 1

beta of portfolio=0.4*1.4+0.25*0.9+w*2.25+(o.35-w)*0

=>1=0.4*1.4+0.25*0.9+w*2.25+(0.35-w)*0

=>w=0.0956

So, Investment in Stock C is 9.56% and in risk free asset it is 35%-9.56%=25.44%

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