Question

1. You have a portfolio that has equal amounts invested in the
following common stocks. What is the beta of the
portfolio?

Security | Beta |

Bank of America | 1.96 |

CA Technologies | 1.24 |

Toyota Motor Corporation | 0.65 |

International Business Machines | 0.62 |

A.1.05

B.1.00

C.1.12

D.1.19

2. Logtec is buying new equipment that has the following cash
flows:

Year | 0 | 1 | 2 | 3 |

Cash Flow | -$500 | $100 | $200 | $250 |

What is the NPV if the interest rate is $9%?

A. -$17.7

B. $482.24

C. -$537.78

D. -$46.88

Answer #1

Part A:

Portfolio Beta = Weighted Avg Beta of securities in that Portfolio.

Security | Weight | Beta | WTd Beta |

Bank of America | 0.25 | 1.96 | 0.49 |

CA Technologies | 0.25 | 1.24 | 0.31 |

Toyota | 0.25 | 0.65 | 0.1625 |

IBM | 0.25 | 0.62 | 0.155 |

Portfolio Beta | 1.1175 |

OPtion C is correct.

Part B:

NPV = PV of Cash Inflows - PV of Cash outflows

Year |
CF |
PVF @9% |
Disc CF |

0 | $ -500.00 | 1.0000 | $ -500.00 |

1 | $ 100.00 | 0.9174 | $ 91.74 |

2 | $ 200.00 | 0.8417 | $ 168.34 |

3 | $ 250.00 | 0.7722 | $ 193.05 |

NPV |
$
-46.88 |

OPtion D is correct.

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