Question

Finance 4310 Homework Problem Given the following information about Stock A: P. = $62.75 BA= 1.3 D = $2.20 paid at end of year K = 11% annual R = 5% annual a. Estimate the price of stock A at the end of the year b. Suppose that Stock a is combined with two other stocks as follows: Stock Proportion Beta 0.25 0.40 0.35 1.3 0.9 1.1 What is the beta of the portfolio of three stocks?

Answer 1

a). According to the capm,

r = rF + [Beta * (kM - rF)]

= 5% + [1.3 * (11% - 5%)] = 5% + [1.3 * 6%] = 5% + 7.8% = 12.8%

r = [P1 - P0 + D1] / P0

0.128 = [P1 - $62.75 + $2.20] / $62.75

0.128 * $62.75 = P1 - $60.55

$8.032 + $60.55 = P1

P1 = $68.582

b). Portfolio's Beta = $\sum_{i=1}^{n}$ [Weight_i * Beta_i]

= [0.25 * 1.3] + [0.40 * 0.9] + [0.35 * 1.1]

= 0.325 + 0.36 + 0.385 = 1.07