Question

4. You are asked to estimate the return from a stock based on the following information: Rf= 2%, Risk premium = 6%, and stock Beta of .95. The Expected return is: a. 7.07% b. 7.7% c. 5.8% d. 7.8% e. 7% 5. Citibank economists project the following scenarios for 2021: 35% chance of recession, 45% chance of a neutral economy and the remaining chance of a boom. Given the following returns for your portfolio for each scenario [-18%, 12% & 17%, respectively), calculate the expected return of your portfolio. a. 25% b. 15.1% c. -2.5% d. 2.5% e. -8.4% 6. You are constructing a portfolio of two assets with a desired portfolio Beta of 1.25. If the two assets are equally weighted and the Beta of one asset is 0.9, what is the Beta of the other? a. 1.5 b. 1.75 c. 1.1 d. 2.0 e. 1.6

Answer 1

Question 4:

Option b is correct

Rf = 2%

Risk Premium = 6%

Stock Beta = 0.95

Expected Return = Rf + (Beta * Risk Premium)

= 2% + (0.95 * 6%)

= 2% + 5.7%

= 7.7%

Expected return is 7.7%

Question 5:

Option d is correct

Expected Return of your portfolio = (35% * -18%) + (45% * 12%) + (20% * 17%)

= -6.3% + 5.4% + 3.4%

= 2.5%

Expected return of your portfolio is 2.5%

Question 6:

Option e is correct

Weight of one asset = 0.5

Weight of another asset = 0.5

Beta of one asset = 0.9

Beta of other = β

Beta of portfolio = 1.25

Desired Portfolio Beta = (Weight of one asset * Beta of one asset ) + (Weight of another asset * Beta of another asset)

1.25 = (0.5 * 0.9) + (0.5 * β )

0.5 β = 1.25 - 0.45

0.5 β = 0.8

β = 1.6

Beta of another asset is 1.6