Question

4 Stocks below

A В C Е 1 25 POINTS 2 You currently own the four stocks below. 3 4 1. Please compute the portfolio beta and expected return. Put your final answers in the 5 provided green shaded cells. 6 2. Which of the stocks should you sell? Why? 7 10 11 3. Assume you sell the stock you mentioned in #2 above and invest the proceeds in an S&P 12 500 index fund. What will your new portfolio beta and expected return be? Put your answers in the provided cells. 13 14 15 Expected Stock 16 Investment Return Beta $ $ $ 17 А 10,000 11.60% 1.40 20,000 13.00% 18 B 1.60 19 7.30% 40,000 0.70 20 7.50% 0.80 100,000 21 22 Risk-Free Rate 3.00% 23 Expected Market Return 9.00% 24 25 ORIGINAL 26 Portfolio Beta 27 Portfolio Expected Return 28 AFTER TRANSACTIONS 29 New Portfolio Beta 30 New Portfolio Expected Return F

Answer 1

Font Alignment Styles Clipboard Number Cells A B C E F H I J K L М Weight 1 Stock Investment Expected return Beta 6.14% 6.25% 2 10000 11.60% 1.4 5.88% 0.68% 0.08 13.00% 11.76% 3 B 20000 1.6 1.53% 0.19 4 C 40000 7.30% 0.7 6.14% 23.53% 1.72% 0.16 5 100000 7.50% 0.8 5.63% 58.82% 4.41% 0.47 6 Risk free rate 7 3% 8 Expected market return Market risk premium 9% 6% 10 1 ORIGINAL 11 Portfolio beta 0.91 Portfolio expected return 12 8.34% 13 14 2 We should sell stock D as it eaning less than market risk premium which is 6% 15 Weight 5.88% 16 3 Stock Investment Expected return Beta 6.14% 6.25% 6.14% 17 A 10000 11.60% 1.4 0.68% 0.08 20000 40000 100000 B 13.00% 18 1.6 11.76% 1.53% 0.19 23.53% 58.82% 19 C 7.30% 0.7 1.72% 0.16 S & P 20 9.00% 6.00% 5.29% 0.59 21 Risk free rate 22 3% 23 Expected market return Market risk premium 9% 6% 24 25 AFTER TRANSACTION 1.02 26 Portfolio beta Portfolio expected return 9.22% 27 28 29 30

.00 .0 Format Painter Formatting as Table Styles Clipboard Font Alignment Number Styles Cells A В C E F G H I J К Stock Weight E2/SUM(SE$2:$E$5) -E3/SUM(SE$2:$E$5) =E4/SUM($E$2:$E$5) -E5/SUM(SES2:$E$5) Investment Expected return Beta 1.4 (F2-SD$7)/G2 1.6 (F3-SD$7)/G3 0.7 (F4-SD$7)/G4 0.8 (F5-SD$7)/G5 2 A 10000 0.116 =12*F2 =12*G2 0.13 =13*G3 3 B 20000 13*F3 40000 100000 4 C 0.073 =14 F4 =14*G4 = 15*G5 5 D 0.075 I5*F5 6 7 Risk free rate 0.03 8 Expected market return Market risk premium 1 ORIGINAL 0.09 9 =D8-D7 10 SUM(K2:K5) -SUM(J2:J5) 11 Portfolio beta 12 Portfolio expected return 13 14 2 We should sell stock D as it 15 Weight 1.4 F17-SD$7)/G17 =E17/SUM($E$17:$E$20) =I17*F17 =I17*G17 1.6 (F18-SDS7)/G18 -E18/SUM(SE$17:SE$20) -I18*F18 =I18*G18 0.7 F19-SD$7)/G19 =E19/SUM($E$17:$E$20) =I19*F19 =119*G19 -(F20-SD$7)/G20 =E20/SUM(SE$17:SE$20) =120*F20 =120*G20 16 3 Stock Investment Expected return Beta 10000 0.116 0.13 17 A 18 B 20000 19 C 40000 0.073 S & P 20 100000 D8 1 21 Risk free rate 22 0.03 0.09 23 Expected market return Market risk premium 24 -D23-D22 25 AFTER TRANSACTION -SUM(K17:K20) -SUM(J17:J20) 26 Portfolio beta Portfolio expected return 27 28.