You invest in a portfolio of 5 stocks with anequal investment in each one. The betas ofthe 5 stocks are as follows: 0.8, -1.3, 0.95,1.2, and 1.4.The risk-free return is 3% and the marketreturn is 7%.a. Compute the beta of the portfolio.b. Compute the required return of theportfolio.

This consists of two parts: In the first part we need to calculate the beta of the portfolio. In the…

You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: 0.8, -1.3, 0.95, %3D 1.2, and 1.4. The risk-free return is 3% and the market return is 7%. a. Compute the beta of the portfolio. b. Compute the required return of the portfolio.

You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: 0.8, -1.3, 0.95, %3D 1.2, and 1.4. The risk-free return is 3% and the market return is 7%. a. Compute the beta of the portfolio. b. Compute the required return of the portfolio.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

You invest in a portfolio of 5 stocks with an
equal investment in each one. The betas of
the 5 stocks are as follows: 0.8, -1.3, 0.95,
1.2, and 1.4.
The risk-free return is 3% and the market
return is 7%.
a. Compute the beta of the portfolio.
b. Compute the required return of the
portfolio.

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