Hi!!
(a) Suppose the expected return on the market portfolio is 13.8
percent and the risk free rate is 6.4 percent. A companies stock has a
beta of 1.2. Assume the capital-asset-pricing model holds.
1. What is the expected rate of return?
According to the CAPM:
E = rf + Beta * [E_m ? rf]
where
E = the expected return on the security
rf = the risk-free rate
E_m = the expected return on the market portfolio
Then:
E = 0.064 + 1.2 * (0.138-0.064) =
= 0.064 + 1.2 * 0.074 =
= 0.064 + 0.0888 =
= 0.1528
The expected return on the company's stocks is 15.28%
2. If the risk free rate decreases to 3.5 percent, what is the
expected return on the companies stock?
If the risk free rate decreases to 3.5 we have that:
E = 0.035 + 1.2 * (0.138-0.035) =
= 0.035 + 1.2 * 0.103 =
= 0.035 + 0.1236 =
= 0.1586
If the risk free rate decreases to 3.5% the expected return on the
company's stock will be 15.86%; there will be a non-significant
change.
------------------------------------------------------
B. Suppose you have invested $30,000 in the following four stocks:
Stock A $5,000 Beta 0.75
Stock B $10,000 Beta 1.1
Stock C $8,000 Beta 1.36
Stock D $7,000 Beta 1.88
The risk free rate is 4 percent and the expected return on the market
portfolio is 15 percent. Based on the capital asset pricing model.
What is the expected rate of return on the above portfolio?
We need to calculate the beta of the portfolio. Since the beta of a
portfolio is the weighted average of the betas of its individual
securities, we need the "weight" of each stock in the portfolio (Wi):
Total Investment = $5,000 + $10,000 + $8,000 + $7,000 = $30,000
WA = $5,000 / $30,000 = 1/6
WB = $10,000 / $30,000 = 1/3
WC = $8,000 / $30,000 = 4/15
WD = $7,000 / $30,000 = 7/30
Then:
Beta_ P = WA*Beta_A + WB*Beta_B + WC*/Beta_C + WD*Beta_D =
= (1/6)*(0.75) + (1/3)*(1.1) + (4/15)*(1.36) + (7/30)*(1.88) =
= 1.293
According to the CAPM:
Ep = rf + Beta_P * [E_m ? rf]
where
Ep = the expected return on the portfolio
rf = the risk-free rate
E_m = the expected return on the market portfolio
Beta_P 0 portfolio's beta
For this problem they are:
rf = 0.04
Beta_P = 1.293
E_m = 0.15
Ep = 0.04 + 1.293*(0.15 ? 0.04) =
= 0.1822
The expected return on the portfolio is 18.22%.
-----------------------------------------------------------
(a) If one of your stocks has a relatively high beta of 1.4 and is
currently doing well, why would you want a stock in your portfolio
with a relatively low beta of .7 that has been under performing? By
diversifying your investments according to betas, have you entirely
removed the potential risk of losses due to a declining stock market?
(b). If you are relatively risk adverse, would you require a higher
beta stock to induce you to invest than the beta required by a person
more willing to take risks? Explain. Is it possible to construct a
portfolio that is risk free? Explain.
Regarding to this two questions I found the answer at TermPaperGenie.com, I
cannot reproduce it here due copyright restrictions but you can easily
read it after the following link:
"Risk Management"
http://www.termpapergenie.com/risk_management.html
--------------------------------------------------------
I hope that htis helps you, feel free torequest for a clarification if you need it.
Regards,
livioflores-ga |
