Question

10-3 You have a portfolio with a beta of 1.37. What will be the new portfolio beta if you keep 93 percent of your money in the old portfolio and 7 percent in a stock with a beta of 0.97? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

New Portfolio Beta _____________

10-4 Suppose Universal Forest’s current stock price is $66.00 and it is likely to pay a $0.39 dividend next year. Since analysts estimate Universal Forest will have a 11.5 percent growth rate, what is its required return? (Round your answer to 2 decimal places.)

  

Required return

___________ %

10-5  

Following are four economic states, their likelihoods, and the potential returns:

  

Economic State		Probability		Return
Fast growth		0.33		67	%
Slow growth		0.41		16
Recession		0.10		–24
Depression		0.16		–56

  

Compute the expected return and standard deviation. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

  

Expected return		________ %
Standard deviation		________%

Answer 1

10-3) New Portfolio beta = Beta of old portfolio x Weight of old portfolio + Beta of new stock x Weight of new stock

or, New Portfolio beta = 1.37 x 93% + 0.97 x 7% = 1.342 or 1.34

10-4) Required return as per constant dividend growth model can be computed as follows -

Ke = [ D1 / P0 ] + g

where, Ke = required return, D1 = expected dividend, P0 = Stock price, g = growth rate

Ke = [ $0.39 / $66 ] + 0.115 = 0.120909 or 12.09%

10-5) Expected return

Expected return = sum of (Return_state x Probability_state)

or, Expected return = 67% x 0.33 + 16% x 0.41 + - 24% x 0.10 + - 56% x 0.16 = 17.31%

Standard Deviation

or, Standard deviation of stock = 42.9657% or 42.97%