Problem 1: You invest in a portfolio of 5 stocks with an equal investment in eac
ID: 2655443 • Letter: P
Question
Problem 1:
You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .75, -1.2, .90, 1.3, 1.5. The risk free return is 4% and the market return is 9%. (Not a multiple choice problem)
A. Compute the beta of the portfolio
B. Compute the required return of the portfolio
Problem 2:
You are given the following probability distribution for a stock: (Not a multiple choice problem)
Pr. Outcome.5
.4 10%
.1 -6%
.5 12%
A. Compute the expected return of this stock
B. Compute the standard deviation
Problem 3:
You are given the following probability distribution for a stock: (Not a multiple choice problem)
Pr. Outcome.6
.4 -4%
.6 12%
A. Compute the expected return
B. Compute the standard deviation
C. Presuming the stock returns are normally distributed, what do these results indicate?
Problem 4:
A stock has a beta of 0.8. The market return is 14% and the risk free return is 3%. Compute the required return for this stock.
Explanation / Answer
Dear student - Please ask one question per post. I have solved all the questions except Computation of SD but try to post questions seperartely to get the best answers. Sometimes expert knows only One question so he will be abe to answer only that question Problem 1 A. Beta of portfolio = (.75+ (-1.2) + .90 + 1.3 +1.5)/5 Beta of portfolio = 3.25/5 Beta of portfolio = .65 B ke = Rf +Beta(Rm- Rf) Beta 0.65 Return on Market 9% Risk Free Rate 4% ke = 4% + .65 (9%-4%) ke =4% + 3.25% ke = 7.25% Required return is 7.25% Problem 2 Probability Outcome Prob*Outcome 0.40 10% 4.00% 0.10 -6% -0.60% 0.50 12% 6.00% 1.00 9.40% Expected return is 9.40% Problem3 Probability Outcome Prob*Outcome 0.40 -4% -1.60% 0.60 12% 7.20% 1.00 5.60% Expected return is 5.6% Problem 4 ke = Rf +Beta(Rm- Rf) Beta 0.80 Return on Market 14% Risk Free Rate 3% ke = 3% + .80(14%-3%) ke =3% + 8.8% ke = 11.8% Required return is 11.8%