Copy of 132680-finance-beta+and+required+return

# Copy of 132680-finance-beta+and+required+return - If the...

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Stock Investment Beta A \$0.4 million 1.5 B \$0.6 million (0.50) C \$1.0 million 1.25 D \$2.0 million 0.75 Security Amount Invested Beta \$0.40 million 1.5 \$0.60 million -0.5 \$1.00 million 1.25 \$2.00 million 0.75 \$4.00 million The risk-free rate is 6% and the expected return on the market portfolio is 14% Step 1: calculate the weights of the stock in the portfolio: Security Explanation Stock A \$0.40 10.00% =0.4/4 Stock B \$0.60 15.00% =0.6/4 Stock C \$1.00 25.00% =1/4 Stock D \$2.00 50.00% =2/4 Total= \$4.00 100.00% Step 2: Calculate the expected return on each of the 4 stocks based on CAPM CAPM (Capital Asset Pricing Model equation is: risk free rate= 6.0% return on market portfolio= 14.0% Security Beta Explanation Stock A 1.5 18.00% =6.%+1.5*(14.%-6.%) Problem: Suppose you are the money manager of a \$4 million investment fund.  The fund con four stocks with the following betas:

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Unformatted text preview: If the market required rate of return is 14 percent and the risk-free rate is 6%, what is the funds return? Stock A Stock B Stock C Stock D Amount Invested (millions) Weights w i r A = r f + β A (r m – r f ) r f = r m = Expected return ri Stock B-0.5 2.00% =6.%+-0.5*(14.%-6.%) Stock C 1.25 16.00% =6.%+1.25*(14.%-6.%) Stock D 0.75 12.00% =6.%+0.75*(14.%-6.%) Step 3: Security Explanation Stock A 10.00% 18.00% 1.80% =10.%*18.% Stock B 15.00% 2.00% 0.30% =15.%*2.% Stock C 25.00% 16.00% 4.00% =25.%*16.% Stock D 50.00% 12.00% 6.00% =50.%*12.% 100.00% Total= 12.10% Answer: The expected return on the above portfolio= 12.10% Return on portfolio r p = r p =Σw i r i = w 1 r 1 + w 2 r 2 +w 3 r 3 +w 4 r 4 Weight (w i ) return r i wi r i nsists of s required...
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Copy of 132680-finance-beta+and+required+return - If the...

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