Question

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.1. Stock B has an expected return of 16% and a beta of 1.2. The market degree of risk aversion, A, is 4. The variance of return on the market portfolio is 0.0175. The risk-free rate is 5%. Required: (4*2.5 = 10pts) A. What is the expected return of the market? B. Using the CAPM, calculate the expected return of stock A. C. Using the CAPM, calculate the expected return of stock B. D. Which one of those two stocks is best to buy? Why?

Answer #1

Suppose you collect the information of two
stocks:
Expected Return
Standard Deviation
Beta
Stock A
13%
15%
1.6
Stock B
9.2%
25%
1.1
a. If you have a well-diversified portfolio of 50 stocks and you
are considering adding either Stock A or B to that portfolio, which
one is a riskier addition and why?
If you are a new investor looking for your first stock investment,
which is a riskier investment for you and why?
b. If the...

14. Stock A has a beta of 1.95 and a standard deviation of
return of 42%. Stock B has a beta of 3.75 and a standard deviation
of return of 70%. Assume that you form a portfolio that is 60%
invested in Stock A and 40% invested in Stock B. Using the
information in question 13, according to CAPM, what is the expected
rate of return on your portfolio? Enter your answer rounded to two
decimal places.
Question 13 for...

Stock A has an expected return of 13% and a standard deviation
of 22%, while Stock B has an expected return of 15% and a standard
deviation of 25%. If an investor is less risk-averse, they will be
likely to choose…
A. Stock A
B. Stock B
Stock A has a beta of 1.8 and an expected return of 12%. Stock B
has a beta of 0.7 and an expected return of 7%. If the risk-free
rate is 2% and...

The expected return and betas for three stocks are given
below:
Stock
EXPECTED RETURN (%)
BETA
A
11
1.4
B
9
1.2
C
10
1.7
Market returns, R m, is 8% and risk-free rate is 3%.
Which of the three stocks is undervalued according
to the CAPM?

Stock X has a 10% expected return, a beta coefficient of 0.9,
and a 35% standard deviation of expected returns. Stock Y has a
12.5% expected return, a beta coefficient of 1.2, and a 25%
standard deviation. The risk-free rate is 6%, and the market risk
premium is 5%.
a. Calculate each stock’s coefficient of variation.
b. Which stock is riskier for a diversified investor?
c. Calculate each stock’s required rate of return.
d. On the basis of the two...

Stock X has a 10% expected return, a beta coefficient of 0.9,
and a 35% standard deviation of expected returns. Stock Y has a
12.5% expected return, a beta coefficient of 1.2, and a 25%
standard deviation. The risk-free rate is 6%, and the market risk
premium is 5%.
a. Calculate each stock’s coefficient of variation.
b. Which stock is riskier for a diversified investor?
c. Calculate each stock’s required rate of return.
d. On the basis of the two...

#24 Stock A has a beta of 1.2 and an expected return of 12%.
Stock B has a beta of 0.7 and an expected return of 8%. If the
risk-free rate is 2% and the market risk premium is 8%, what is
true about the two stocks? A. Stock A is underpriced and stock
B is overpriced B. Both stocks are underpriced
C. Stock A is overpriced and stock
B is underpriced
D. Both stocks are correctly priced
E. Both...

Stock A has an expected return of 18.6 percent and a beta of
1.2. Stock B has an expected return of 15 percent and a beta of
0.9. Both stocks are correctly priced and lie on the Security
market Line (SML). What is the reward-to-risk ratio for stock A?
(6marks) (Use the simplest way to calculate)

You are considering three stocks. Stock A has an
expected return of 5%. Stock B has an expected return of
12%. Stock C has an expected return of
16%. You have the following variance-covariance
matrix.
Stock A
Stock B
Stock C
Stock A
.070
.050
-.060
Stock B
.050
.100
-.025
Stock C
-.060
-.025
.170
Calculate the expected return and portfolio variance assuming
you invest $100,000 in stock A, $200,000 in stock B, and $300,000
in stock C.
How does this answer in...

A portfolio has the following composition:
Security
Weight
Expected Beta
A
10%
0.8
B
20%
1.1
C
30%
1.3
D
40%
0.7
What is the expected beta of the portfolio?
Stock A had a market value of $20, Stock B had a market value of
$30. During the year, Stock A generated cash flow of $3 and Stock B
generated cash flow of $4. The current market values are, Stock A
is $22 and Stock B is $31.
What is...

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