Question

Suppose you hold a diversified portfolio consisting of a $12,356 invested equally

in each of 10 different common stocks.  The portfolio’s beta is 1.39.  Now

suppose you decided to sell one of your stocks that has a beta of 1 and to

use the proceeds to buy a replacement stock with a beta of 1.  What would

the portfolio’s new beta be?

1.19

1.49

1.39

1.09

1.29

The risk-free rate is 3 percent.  Stock A has a beta = 1.3 and Stock B has a

beta = 1.9.  Stock A has a required return of 13.4 percent.  What is Stock B’s

required return?

18.30%

18.10%

18.20%

17.90%

18.00%

Drongo Corporation’s 4-year bonds currently yield 3.1 percent and have an inflation premium

of 1.3%.  The real risk-free rate of interest, r*, is 1.4 percent and is assumed to be constant.  

The maturity risk premium (MRP) is estimated to be 0.1%(t - 1), where t is equal to the time to

maturity.  The default risk and liquidity premiums for this company’s bonds total 0.1 percent

and are believed to be the same for all bonds issued by this company.  If the average inflation

rate is expected to be 5.2 percent for years 5 and 6, what is the yield on a 6-year bond for

Drongo Corporation?

4.80%

5.00%

4.60%

4.70%

4.90%

Answer 1

1.
If the replaced stock has the same beta then beta remains unchanged
1.39

2.
=risk free rate+beta*(return of A-risk free rate)/beta of A
=3%+1.9*(13.4%-3%)/1.3
=18.2000%

3.
given

default risk premium+liquidity premium=0.1%
real risk free rate=1.4%
maturity risk premium=0.1%*(6-1)=0.5%
inflation premium=(inflation premium on 4 year*4+2*average inflation in year 5 to 6)/6=(1.3%*4+5.2%*2)/6=2.6000%

yield on 7 year bond=real risk free rate+inflation premium+maturity risk premium+default risk premium+liquidity premium=1.4%+2.6%+0.5%+0.1%=4.6000%