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%. A. Compute the beta of the portfolio B. Compute the required return of the portfolio
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%. A. Compute the beta of the portfolio B. Compute the required return of the portfolio
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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%.
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:
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 3:
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.
Expert Solution
Step 1: Formula.
According to bartleby guidelines , if multiple questons are asked , then st question needs to be solved.
Accordingly ,we have answered 1st problem for you.
According to Capital asset pricing model ,
k= Rf+[ b*(Rm-Rf)]
where
k =Required return
Rf = risk free rate
Rm= market rate
b= beta
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