Question

# 1. Beale Manufacturing Company has a beta of 1.2, and Foley Industries has a beta of...

1. Beale Manufacturing Company has a beta of 1.2, and Foley Industries has a beta of 0.9. The required return on an index fund that holds the entire stock market is 10.5%. The risk-free rate of interest is 7%. By how much does Beale's required return exceed Foley's required return?

2. Suppose you held a diversified portfolio consisting of a \$7,500 investment in each of 20 different common stocks. The portfolio's beta is 1.83. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for \$7,500 and use the proceeds to buy another stock with a beta of 2.04. What would your portfolio's new beta be?

3. Assume that the risk-free rate is 6% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 1.1? Round your answer to two decimal places.

4. An individual has \$10,000 invested in a stock with a beta of 0.6 and another \$70,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta?

5.

A stock's returns have the following distribution:

 Demand for the Company's Products Probability of This Demand Occurring Rate of Return If This Demand Occurs Weak 0.2 (36%) Below average 0.1 (7) Average 0.3 18 Above average 0.2 27 Strong 0.2 48 1.0

Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return: __ %

Standard deviation: __ %

Coefficient of variation:

Sharpe ratio:

#### Homework Answers

Answer #1

1. Beale's required return exceed Foley's required return by =(Beta of Beale-Beta of Foeley)*(Expected Return-Risk Free Rate)
=(1.2-0.9)*(10.5%-7%) =1.05%

2. Beta of New Portfolio =(Beta of 19 stocks*19+Beta of New Stocks*1)/(Total Number of stocks)
=(1.83*19+2.04*1)/20 =1.84

3. Required Rate using CAPM =Risk Free Rate+beta*(Market return -Risk Free Rate) =6%+1.1*(12%-6%) =12.60%

4. Portfolio Beta =weight of Stock 1*Beta 1+weight of Stock 2*Beta 2 =10000/(10000+70000)*0.6+70000/(10000+70000)*2=1.83

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