Chapter 12, Problem 6QAP

a

Summary Introduction

Adequate information:

Expected return of Stock A $\left({\text{ER}}_{\text{A}}\right)$ = 10.5%

Expected return of Stock B $\left({\text{ER}}_{\text{B}}\right)$ = 13%

Expected return of Stock C $\left({\text{ER}}_{\text{C}}\right)$ = 15.7%

Expected return of the market $\left({\text{ER}}_{\text{M}}\right)$ = 14.2%

Beta of Stock A $\left({\text{β}}_{\text{A}}\right)$ = 1.20

Beta of Stock B $\left({\text{β}}_{\text{B}}\right)$ = 0.98

Beta of Stock C $\left({\text{β}}_{\text{C}}\right)$ = 1.37

Beta of the market $\left({\text{β}}_{\text{M}}\right)$ = 1

To compute: Market model equation for each stock.

Introduction: The market model equation for a stock is a mathematical equation consisting of the expected return, beta, market return, expected market return, and the unsystematic risk of the stock.

b

Summary Introduction

Adequate information:

Weight of Stock A $\left({\text{W}}_{\text{A}}\right)$ = 30%

Weight of Stock B $\left({\text{W}}_{\text{B}}\right)$ = 45%

Weight of Stock C $\left({\text{W}}_{\text{C}}\right)$ = 25%

To compute: Return on the portfolio

Introduction: The return on portfolio refers to the weighted average return on each of the stocks in the investment portfolio.

c

Summary Introduction

Adequate information:

Return on the market $\left(\text{RM}\right)$ = 15%

To compute: Return on each stock and portfolio

Introduction: The return on portfolio refers to the return on each of the stocks proportionately as per their weightage in the portfolio.