8 when is this type of risk most relevant when

This preview shows page 8 - 10 out of 10 pages.

8. When is this type of risk most relevant?
Part 2:You did some additional research, and also found the following values for eachstock’sbeta coefficient:Stock AStock BBeta Coefficient0.71.4Other current information is as follows:- Current Risk-free Rate: 5%- Current Market Rate: 12%1.What type of risk are we now considering?
2.What is the current Market Risk Premium?
3.What is the required return for each stock suggested by CAPM?
4.Will diversification reduce the type of risk identified in #1 above?
5.Is there anything that can help to reduce this type of risk in a portfolio of stocks?If so,what.
6.Suppose that you invest $1,000 in Stock A, $1,500 in Stock B, and $2,500 in Stock Cthat has a beta of 2.0. Find your portfolio’s beta and required rate of return.
Portfolio’s beta = (0.2 x 0.7) + (0.3 x 1.4) + (0.5 x 2) = 1.56Required Return = 5% + (12% - 5%)1.56 = 15.92%
End of preview. Want to read all 10 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Fall
Professor
NOWACKI

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture