Question

2)your fund invests evenly in 10 stocks. you want to sell one stock with a beta of 1.0 and use the money to buy another stock with a beta of 1.5. if the original portfolio has a beta of 1.15. what will the beta be for your new portfolio

3)the difference between equity cost between retained earnings and new stock is primarily due to: a) the corporate tax code B) the agency problems c) flotation costs D) none of the above

4)ace world's common stock has a beta value of -0.5. if the rate of return on the market as a whole increases by 2%, the rate of return on ace world stock will a) increase by 2% b) increase by 1% c) decrease by 2% D) decrease by 1%

Answer 1

Hence beta of new portfolio is 1.2

(3).Difference in equity cost between retained earnings and new stock is primarily due to

Floatation cost

Explanation:-When cost of equity is calculated for retained earnings then there is no floatation cost but when firm issues new stock then floatation cost is incurred

(4).Expected return on stock as per CAPM = Risk free return + (market return-risk free return)* beta

Therefore when market return increases by 2% then expected return on stock will be increased by 2*beta =2*(-0.5)=-1% .

Therefore expected return of Ace world stock will

Decrease by 1%

Correct option is (D)