Problem 8-9 Required rate of return Stock R has a beta of 1.5, Stock S has a bet
ID: 2661741 • Letter: P
Question
Problem 8-9 Required rate of return Stock R has a beta of 1.5, Stock S has a beta of 0.75, theexpected rate of return on an average stock is 13%, and the riskfree rate of return is 7%. By how much does the required return onthe riskier stock exceed the required return on the less riskystock? Problem 8-17 Portfolio beta A mutual fund manager has a $20,000,000 portfolio with a betaof 1.5. The risk free rate is 4.5% and the market risk premium is5.5%. The manager expects to receive an additional$5,000,000, which she plans to invest in a numver of stocks. Afterinvesting the additional funds, she wants the funds requirededreturn to be 13%. What should be the average beta of the new stocksadded to the portfolio? Problem 8-9 Required rate of return Stock R has a beta of 1.5, Stock S has a beta of 0.75, theexpected rate of return on an average stock is 13%, and the riskfree rate of return is 7%. By how much does the required return onthe riskier stock exceed the required return on the less riskystock? Problem 8-17 Portfolio beta A mutual fund manager has a $20,000,000 portfolio with a betaof 1.5. The risk free rate is 4.5% and the market risk premium is5.5%. The manager expects to receive an additional$5,000,000, which she plans to invest in a numver of stocks. Afterinvesting the additional funds, she wants the funds requirededreturn to be 13%. What should be the average beta of the new stocksadded to the portfolio?Explanation / Answer
Beta of Stock R(ßR) 1.5 Beta of Stock S(ßS) 0.75 Expected Rate of Return on Stock(RM) 13% Risk-free Rate (Rf) 7% Calculating Required Return of Stock R(RR): RE = Rf +ß (RM - Rf) RR = 0.07 + 1.5 (0.13 -0.07) RR = 0.07 + 1.5(0.06) RR = 0.07 +0.09 RR = 0.16 (or)16% Required Return of Stock R(RR) = 16% Calculating Required Return of Stock S(RS): RE = Rf +ß (RM - Rf) RS = 0.07 + 0.75 (0.13 -0.07) RS = 0.07 + 0.75(0.06) RS = 0.07 +0.045 RS = 0.115 (or)11.5% Required Return of Stock S(RS) = 11.50% Difference between Stock R's RequiredReturn and Stock S's Required Return = 16% - 11.50% =4.5% Beta of Stock R(ßR) 1.5 Beta of Stock S(ßS) 0.75 Expected Rate of Return on Stock(RM) 13% Risk-free Rate (Rf) 7% Calculating Required Return of Stock R(RR): RE = Rf +ß (RM - Rf) RR = 0.07 + 1.5 (0.13 -0.07) RR = 0.07 + 1.5(0.06) RR = 0.07 +0.09 RR = 0.16 (or)16% Required Return of Stock R(RR) = 16% Calculating Required Return of Stock S(RS): RE = Rf +ß (RM - Rf) RS = 0.07 + 0.75 (0.13 -0.07) RS = 0.07 + 0.75(0.06) RS = 0.07 +0.045 RS = 0.115 (or)11.5% Required Return of Stock S(RS) = 11.50% Difference between Stock R's RequiredReturn and Stock S's Required Return = 16% - 11.50% =4.5%Hope it may help you Beta of Stock R(ßR) 1.5 Beta of Stock S(ßS) 0.75 Expected Rate of Return on Stock(RM) 13% Risk-free Rate (Rf) 7% Calculating Required Return of Stock R(RR): RE = Rf +ß (RM - Rf) RR = 0.07 + 1.5 (0.13 -0.07) RR = 0.07 + 1.5(0.06) RR = 0.07 +0.09 RR = 0.16 (or)16% Required Return of Stock R(RR) = 16% Calculating Required Return of Stock S(RS): RE = Rf +ß (RM - Rf) RS = 0.07 + 0.75 (0.13 -0.07) RS = 0.07 + 0.75(0.06) RS = 0.07 +0.045 RS = 0.115 (or)11.5% Required Return of Stock S(RS) = 11.50% Difference between Stock R's RequiredReturn and Stock S's Required Return = 16% - 11.50% =4.5%