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Unformatted text preview: Finance 320 Problem Set #4 1. Stock in Toys R Busted has a beta of 1.458. The market risk premium is 6.60% and Treasury bills yield 5.77%. Use the CAPM to estimate the expected return on this stock. 2. Mr. Simpson owns an equallyweighted portfolio of four stocks with the following betas: 0.45,0.75,0.02, and 1.1. What is the beta of his portfolio? 3. Alpha Corp. stock has a beta of 1.25 and an expected return of 14%. If the riskfree rate is 6%, then what is the beta of a portfolio comprised of 60% Alpha Corp. and 40% Tbills? What is the expected return on this portfolio? 4. You wish to achieve a portfolio beta of 1.5 by investing only in the market portfolio and the riskfree asset. What proportion of your investment will go into each? 5. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The riskfree rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, which portfolio should you take a short position in and which...
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.
 Fall '10
 Sapp
 Finance

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