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Tutorial 3 - Risk Return (Part 2) PDF

This document provides 9 practice problems for calculating required rates of return for stocks and portfolios using the Capital Asset Pricing Model. It includes calculating betas and required returns for individual stocks and portfolios consisting of multiple stocks. It also discusses whether a company should change its strategy to increase risk and return based on the required return calculation.

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Cham
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225 views

Tutorial 3 - Risk Return (Part 2) PDF

This document provides 9 practice problems for calculating required rates of return for stocks and portfolios using the Capital Asset Pricing Model. It includes calculating betas and required returns for individual stocks and portfolios consisting of multiple stocks. It also discusses whether a company should change its strategy to increase risk and return based on the required return calculation.

Uploaded by

Cham
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 3 – Risk and Return (Part 2)

1) The expected return for the market portfolio is 13%, the expected return on U.S. Treasury
Bills is 2%, and the expected return on AAA-rated short-term corporate bonds is 7%.
Calculate the required return for a stock with a beta equal to 1.5.

2) If you hold a portfolio made up of the following stocks:


Investment Value Beta
Stock A$8,000 1.5
Stock B$10,000 1.0
Stock C$2,000 .5

What is the beta of the portfolio?

3) Use the following data:


Market risk premium = 10%
Risk free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.

What is the required return of your portfolio? Show all work.

4) Bankers Corp has a very conservative Beta of 0.7, while Biotech Corp has a Beta of 2.1.
Given that the T-bill rate is 5%, and the market is expected to return 15%, what is the
required return of Bankers Corp, Biotech Corp, and a portfolio composed of 60% of
Bankers Corp and 40% Biotech Corp?

5) Suppose you are the money manager of a $4 million investment fund. The fund consists of
4 stocks with the following investments and betas:
Stock Investment Beta
($)
A 400,000 1.50
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75

If the market required rate of return is 14% and the risk-free rate is 6%, calculate the fund’s
required rate of return.
6) An investor currently holds the following portfolio:
Amount Invested Beta
8,000 shares of Stock A $16,000 1.3
15,000 shares of Stock B $48,000 1.8
25,000 shares of Stock C $96,000 2.2

If the T-bills return is 4% and the market risk premium is 9%, calculate the required return
on the portfolio for the investor.

7) You hold a portfolio with the following securities:

Percent Expected
Security of Portfolio Beta Return

Able Corporation 20% 3.20 36.0%


Baker Corporation 40% 1.60 20.0%
Charlie Corporation 40% .20 6.0%

What is the required return for the market portfolio given risk-free rate of 5% according to
the CAPM?

8) Redesign Corp is considering a new strategy that would increase its expected return from
12% to 13.9%, but would also increase its beta from 1.2 to 1.8. Given the risk free rate is
5% and the return on the market portfolio is expected to be 10%, calculate the required
return for both current and new strategy. Explain whether Redesign Corp should change its
strategy or not.

9) Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a
correlation coefficient with the market of -0.3, and a beta coefficient of -0.5. Stock B has
an expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with
the market, and a beta coefficient of 1.0. If you are a risk-averse investor, determine which
stock you will add in a diversified portfolio and which stock in a single-asset portfolio.

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