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KIC000028 - Finance 320 Problem Set#4 1 Stock in Toys R...

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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 equally-weighted 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 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 onthis portfolio? 4. You wish to achieve a portfolio beta of 1.5by investing only in the market portfolio and the risk-free 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 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 portfolio should you take a long position in? Use the risk-free asset to construct a factor-mimicking
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