FIN101/102/103/105: Exercises on Risk and Rates of Return

1. Assume that the risk-free rate is 5.5 percent and the market risk premium is 6 percent. A money
manager has $10 million invested in a portfolio that has a required return of 12 percent. The manager
plans to sell $3 million of stock with a beta of 1.6 that is part of the portfolio. She plans to reinvest this
$3 million into another stock that has a beta of 0.7. If she goes ahead with this planned transaction,
what will be the required return of her new portfolio?
2. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common
stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead
mining stock whose b is equal to 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock
in a steel company whose b is equal to 2.0. What will be the new beta of the portfolio?
3. A portfolio manager is holding the following investments in her portfolio:
Stock
1
2
3

Amount Invested
Beta
$300 million
0.7
200 million
1.0
500 million
1.6

The risk-free rate, kRF, is 5 percent and the portfolio has a required return of 11.655 percent. The
manager is thinking about selling all of her holdings of Stock 3, and instead investing the money in Stock
4, which has a beta of 0.9. If she were to do this, what would be the new portfolios required return?
4. Here are the expected returns on two stocks:
Returns
Probability
X
Y
0.1
-20% 10%
0.8
20
15
0.1
40
20
If you form a 50-50 portfolio of the two stocks, what is the portfolios standard deviation?
5. A portfolio manager has a $10 million portfolio, which consists of $1 million invested in 10 separate
stocks. The portfolio beta is 1.2. The risk-free rate is 5 percent and the market risk premium is 6
percent. What is the portfolios required return? The manager sells one of the stocks in her portfolio
for $1 million. The stock she sold has a beta of 0.9. She takes the $1 million and uses the money to
purchase a new stock that has a beta of 1.6. What is the required return of her portfolio after
purchasing this new stock?