CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 8, Problem 18PROB
Summary Introduction
Portfolio beta is used to measure the portfolio’s overall systematic risk of an investment which equals the weighted average of all individual stock’s beta coefficient in a portfolio.
Here,
The cost of equity or required rate of return is “r”.
The risk-free rate is “
The risk premium is “
The market return is “
The beta coefficient is “
The required rate of return of stock Q is 11%, risk-free rate is 4%, and market return is 9%. As per new information, the market risk premium increase by 1%.
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All parts are under one questione adn therefore can be answered per your policy.
3. Measuring stand-alone risk using realized (historical) data
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock.
Consider the case of Falcon Freight Inc. (FF):
Five years of realized returns for FF are given in the following table. Remember:
1.
While FF was started 40 years ago, its common stock has been publicly traded for the past 25 years.
2.
The returns on its equity are calculated as arithmetic returns.
3.
The historical returns for FF for 2014 to 2018 are:
2014
2015
2016
2017
2018
Stock return
8.75%
5.95%
10.50%
14.70%
4.55%
A. Given the preceding data, the average realized return on FF’s stock is .
B. The preceding data series…
Karen Kay, a portfolio manager at Collins Asset Management, is using thecapital asset pricing model (CAPM) for making recommendations to her clients.Her research department has developed the information shown in the followingexhibit.Forecast Returns, Standard Deviations, and BetasForecast Return Standard Deviation BetaLow β stock (X) 14.0% 36% 0.8High β stock (Y) 17.0% 25% 1.5Market index 14.0% 15% 1.0Risk-free rate 5.0%(a) Calculate expected return and alpha for each stock.(b) Identify and justify which stock would be more appropriate for an investorwho wants to add this stock to a well-diversified equity portfolio.(c) Now consider Karen employs the “Betting Against Beta” strategy and let, , and denote the portfolio weights of the investmentin each of the asset classes (e.g. risk-free asset, low beta stock, market index,high beta stock, respectively) such that .According to its investment mandate, Collins Asset Management shouldtarget a gross leverage of 2.3. How much does she have to…
Please do this in Excel using relevant formulas. Stock A
has a beta of 0.5, and investors expect it to return 8%.
Stock B has a beta of 1.5, and investors expect it to
return 12%. Use the CAPM to find the market risk
premium and the expected rate of return on the market.
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