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 onthis 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 isthe beta ofhis portfolio?
3. Alpha Corp. stock has a beta of 1.25and 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 onthis portfolio?
4. You wish to achieve a portfolio beta of 1.5by investing only in the market portfolio and the riskfree
asset. What proportion ofyour investment will go into each?
5. Consider the single factor APT. Portfolio A has abeta of 1.3and 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
portfolio should you take a long position in? Use the riskfree asset to construct a factormimicking
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 Fall '10
 Sapp
 Finance, Arbitrage, Capital Asset Pricing Model, Financial Markets, riskfree rate

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