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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 equally-weighted 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 risk-free rate is 6%, then what is the beta of a portfolio comprised of 60% Alpha Corp. and 40% T-bills? 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 risk-free 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 risk-free 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