PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 23PS
Portfolio betas A portfolio contains equal investments in 10 stocks. Five have a beta of 1.2; the remainder have a beta of 1.4. What is the portfolio beta?
- a. 1.3.
- b. Greater than 1.3 because the portfolio is not completely diversified.
- c. Less than 1.3 because diversification reduces beta.
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Students have asked these similar questions
Capital Asset Pricing Model
The market portfolio has an excess return of 8% and volatility of 15%. The risk free rate is 5%. What is the minimum
required return for a stock that has a volatility of 27% and a market correlation of 0.39.
(Your answer will be a percentage. Enter your answer as a whole number with two decimals. E.g. if your answer is
12.345%, enter 12.34.)
Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.
Compute the beta of the portfolio.
Compute the required return of the portfolio.
Problem 1
You are given the following information about stock X and the market portfolio, M:
Riskless Asset (f)
Stock X
Market Portfolio (M)
E(r)
0.04 (4%)
?
0.10
σ
0.00
0.30
0.20
You are not given the expected return of stock X. The correlation of the returns on the stock X and
the market portfolio is equal to 0.4.
a) What is the beta (6) of stock X?
b) Assuming the CAPM holds, what is the expected return on stock X?
c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market
portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300
in the market portfolio. What is the overall expected return, standard deviation and beta of
this portfolio?
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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- 6. Consider the following performance data for two portfolio managers (A and B) and a common benchmark portfolio: BENCHMARK MANAGER A MANAGER B Return Weight Weight Weight Return Return Stock 0.5 -4.0% 0.6 -5.0% 0.3 -5.0% Bonds 0.3 -3.5 0.2 -2.5 0.4 -3.5 0.1 Cash 0.3 0.3 0.3 0.3 0.3 Evaluation of Asset Management a. Calculate (1) the overall return to the benchmark portfolio, (2) the overall return to Manager A's actual portfolio, and (3) the overall return to Manager B's actual portfo- lio. Briefly comment on whether these managers have under- or outperformed the benchmark fund. b. Using attribution analysis, calculate (1) the selection effect for Manager A, and (3) the allocation effect for Manager B. Using these numbers in conjunction with your results from part (a), comment on whether these managers have added value through their selection skills, their allocation skills, or both.arrow_forwardIf an investor that owns a portfolio with 3 stocks increases their portfolio to 30 stocks, which of the following is MOST LIKELY to happen? Select one: a. risk would increase b. the Sharpe ratio would increase c. return would decrease d. Sharpe would decreasearrow_forwardAn Equity has a beta of 0.9 and an expected return of 9%. A risk free asset currently earns 2%. i.) What is the expected return on a portfolio that is equally invested in two assets? ii.) If a portfolio of the two assets has an expected return of 6%, what is its beta? iii.) If a portfolio of the two assets has a beta of 1.5, what is its weight ? Iv.) If a portfolio of the two assets has a beta of 1.5, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.arrow_forward
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Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY