Problem 18 Intro We know the following expected returns for stock A and the market portfolio,...

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Problem 18 Intro We know the following expected returns for stock A and the market portfolio, given different states of the e

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Answer 1

Answer #1

The beta for stock A is computed as shown below:

Expected return = risk free rate + beta ( return on market - risk free rate )

Expected return is computed as follows:

= 0.3 x - 0.03 + 0.5 x 0.12 + 0.2 x 0.2

= 9.1% or 0.091

Return on market is computed as follows:

= 0.3 x 0.01 + 0.5 x 0.04 + 0.2 x 0.08

= 3.9% or 0.039

Risk free rate = 0.02

Plugging these values in the above mentioned equation, we shall get

0.091 = 0.02 + Beta ( 0.039 - 0.02 )

Beta = 3.74 Approximately

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Answer 2

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