Question

Consider the following information:

Portfolio | Expected Return | Beta | |

Risk-free | 12 | % | 0 |

Market | 13.8 | 1.0 | |

A |
11.8 | 0.9 | |

**a.** Calculate the expected return of portfolio
*A* with a beta of 0.9. **(Round your answer to 2
decimal places.)**

Expected return
%

**b.** What is the alpha of portfolio *A*.
**(Negative value should be indicated by a minus
sign.** **Round your answer to 2 decimal
places.)**

Alpha
%

**c.** If the simple CAPM is valid, is the above
situation possible?

Yes | |

No |

Bonus:

A share of stock is now selling for $125. It will pay a dividend
of $8 per share at the end of the year. Its beta is 1. What do
investors expect the stock to sell for at the end of the year?
Assume the risk-free rate is 7% and the expected rate of return on
the market is 19%. **(Round your answer to 2 decimal
places.)**

Expected selling price:

Answer #1

Return on portfolio A= Risk free rate + beta * ( Market risk - Risk
free rate) = 12% + 0.9 * ( 13.8% - 12%) = 13.62%

b) Alpha = Expected return - Return on portfolio using CAPM model =
11.8% - 13.62% = - 1.82%

c) No simple Capm is not valid as aplha is not included here.

d)Cost of Equity as per CAPM model = Risk free rate + beta * (
Market risk - Risk free rate) =

7% + 1 * ( 19 % - 7%) = 19%

So return = (Price after 1 year + dividend - Price at present
time)/Price at present time

19% = (P_{1} + 8 - 125)/ 125

Selling price P_{1} = 125 * 19% +125 -8 = 140.75

Best of Luck. God Bless

Consider the following information:
Portfolio
Expected Return
Beta
Risk-free
8
%
0
Market
10.2
1.0
A
8.2
0.7
a. Calculate the expected return of portfolio
A with a beta of 0.7. (Round your answer to 2
decimal places.)
b. What is the alpha of portfolio A.
(Negative value should be indicated by a minus sign. Round
your answer to 2 decimal places.)
c. If the simple CAPM is valid, is the above
situation possible?
Yes
No

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