Question

# Suppose you hold a diversified portfolio consisting of a \$12,356 invested equally in each of 10...

 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%

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

real risk free rate=1.4%
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%

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