Question

a) Assume that the risk free rate is 6.5% and that the expected return on the...

a) Assume that the risk free rate is 6.5% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.6?

b) As a risk averse investor, which of the following rules would you use when choosing between two securities A and B?

  • A. Choose the one with the higher return when both A and B have the same risk
  • B. Choose the one with the lower risk when both A and B have same return
  • C. Use the CV to calculate the risk per unit of return when A and B have different risks and return
  • D. All of the above

c) A portfolio consisting of all stocks (market portfolio) has a beta of?

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Answer #1

Ans:- (a) Required return on stock will be given by Risk-free rate + Beta * ( Expected market return - Risk-free rate)

= 6.5% + 0.6 * ( 12% - 6.5% ) = 10.40%

(b) As a risk-averse investor, I will choose all of the above. option D is the right answer.

(c) Market Portfolio or a portfolio consisting of all stocks has a beta of exactly 1.

Beta is nothing but the systematic risk or in other words it a risk that affects the whole market.

Note:- If this answer helps you pls give thumbs up.

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