The 200% weight in asset A is financed by borrowing 100% from the risk-free asset.
#5: Consider the following information about Stock I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession 0.25 0.11 -0.40 Normal 0.50 0.29 0.10 Irrational exuberance 0.25 0.13 0.56 The market risk premium is 8 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.
#6: Suppose you observe the following situation: Security Beta Expected Return Pete Corp 1.35 0.132 Repete Co. 0.80 0.101 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? #7 You are managing a portfolio of 6 stocks, which are held in equal dollar amounts. The current beta of the portfolio is 1.4, and the beta’s of Stock A is 1.8 and of Stock B is 2.0, respectively. If Stock A and Stock B are sold and the proceeds used to purchase 2 replacement stocks, what does the average beta of these 2 replacement stocks have to be to reduce the portfolio beta to 1.25?
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- Fall '18
- Capital Asset Pricing Model, Stock B, Stock A