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%

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