You own $17,390 of Opsware, Inc. stock that has a beta of 3.88. You also own...
You own $17,390 of Opsware, Inc. stock that has a beta of 3.88. You also own $26,790 of Lowe's companies (beta = 1.72) and $2,820 of New York Times (beta = 0.70). Assume that the market return will be 9 percent and the risk-free rate is 3 percent.
What is the market risk premium?
What is the risk premium of each stock? (3 answers)
What is the risk premium of the portfolio?
Homework Answers
Calculation of Risk Premium:
Risk Premium = Market Return rate (Rm)- Risk Free rate (Rf)
As given in the question:
Rm= 9
Rf= 3
Risk Premium = 9-3 = 6%
Calculation Risk Premium of Each Stock:
Risk Premium of each stock= Stock Beta x (Rm-Rf)
| Stock | Beta | Risk Premium= Rm-Rf |
Stock Risk Premium= (Stock Beta x Risk Premium) |
| Opsware, Inc. | 3.88 | 6 | 23.28 |
| Lowe's companies | 1.72 | 6 | 10.32 |
| New York Times | 0.7 | 6 | 4.2 |
Calculation Risk Premium of Portfolio:
| Stock |
Stock Risk Premium= (Stock Beta x Risk Premium) |
Value | Percentage of Portfolio | Weighted Average of Stock Risk Premium |
| Opsware, Inc. | 23.28 | 17390 | 37.00% | 8.6136 |
| Lowe's companies | 10.32 | 26790 | 57.00% | 5.8824 |
| New York Times | 4.2 | 2820 | 6.00% | 0.252 |
| Total | 47000 | Total | 14.7480 |
Therefore, the Risk premium of Portfolio is 14.7480%
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