17. Beta of portfolio can be calculated in following manner
Beta of portfolio = Beta of Stock 1 * weight of stock 1 in portfolio + Beta of Stock 2 * weight of stock 2 in portfolio + Beta of risk free asset * weight of risk free asset in portfolio
We know that all the above three securities are equally weighted in this portfolio, therefore
Weight of stock 1 in portfolio = Weight of stock 2 in portfolio = weight of risk free asset =1/3
Beta of portfolio = 1 (the portfolio as risky as market)
Beta of Stock 1 = 1.26
Beta of Stock 2 =?
Beta of risk free asset = 0
Now put the values into above equation
1 = 1.26 * (1/3) + Beta of Stock 2 * (1/3) + 0 * (1/3)
Beta of Stock 2 = 1 - 1.26 * (1/3) = 0.42
Therefore beta of other stock must be 0.42
18. Expected rate of return of stock = risk free rate + beta of stock * (The rate of market return- risk free rate)
Where,
Expected rate of return of stock =?
Risk free rate = 4.80%
Beta of stock = 0.92
The rate of market return = 10.3%
Therefore,
Expected rate of return of stock = 4.80% + 0.92 * (10.3% - 4.80%)
= 4.80% + 0.92 * 5.50%
= 4.80% + 5.06% = 9.86%
Expected rate of return of this stock must be 9.86%
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