Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM ) is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%, and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%, and -10%, respectively. Compute the beta and expected return of portfolio 2.

Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM ) is 10%. (a) Stock 1: β = 0.90. Compute the expected return of stock 1. (b) Stock 2: β = 1.1. Compute the expected return of stock 2. (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%, and 40%, respectively. Compute the beta and expected return of portfolio 1. (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%, and -10%, respectively. Compute the beta and expected return of portfolio 2.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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