Question

Problem 11. [4 pts] Emily DiDonato is thinking of buying Berkshire Hathaway Inc. (BRK-B) priced at $200 per share. She assumes that that risk-free rate is about 5% and the market risk premium (MRP) is 10%. If she thinks, the stock will rise to $320 per share by the end of the year, what beta would it need to have for this expectation to be consistent with the CAPM? (Show your calculations)

Answer 1

Problem 11.

Return in one year = (320-200)/200 = 60%

Using CAPM model,

r = r_f +Beta(r_m - r_f)

Beta = (0.6 - 0.05)/0.1

Beta = 5.5

Problem 12.

Portfolio beta = w₁ * Beta₁ + w₂ + Beta₂

For portfolio beta = 1

1 = w₁ * 2 + (1 - w₁) * 0.75

So,

w₁ = Weight of Stock XX = 20%

w₂ = Weight of Stock YY = 80%