Question

1. You own a stock portfolio invested 30 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are 0.80, 1.18, 1.19, and 1.36, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

what is the Portfolio beta ?

2.

A stock has a beta of 0.95, the expected return on the market is 17 percent, and the risk-free rate is 9 percent.

What must the expected return on this stock be? (Do not round your intermediate calculations. Round the final answer to 2 decimal places.)

Expected return              %

Answer 1

Dear student, only one question is allowed at a time. But I am answering both

1)

Portfolio beta is the weighted average of the betas of the stocks of the portfolio

= Weight of stock Q x Beta of stock Q + Weight of stock R x Beta of stock R + Weight of stock S x Beta of stock S + Weight of stock T x Beta of stock T

= 0.30 x 0.80 + 0.25 x 1.18 + 0.25 x 1.19 + 0.20 x 1.36

= 0.24 + 0.295 + 0.2975 + 0.272

= 1.10

So, the portfolio beta is 1.10

2)

As per Capital Asset Pricing Model,

Re = Rf + ( Rm – Rf) x Beta

Where,

Re = Expected return on the stock

Rf = Risk free rate of return = 9%

Rm = Expected return on market = 17%

Beta = Beta of the stock = 0.95

So, Re = 9% + ( 17% - 9% ) x 0.95

= 9% + 8% x 0.95

= 9% + 7.6%

= 16.6%

So, the required rate of return is 16.6%