Question 1

Suppose the risk-free rate is 4 percent, the market risk premium is 8.6 percent, and
a particular stock has a Beta of 1.3. Based on the CAPM:

What is the expected return on this stock?

Answer

…………….
Question 2

CAPM

Suppose the risk-free rate is 3.5% percent.

The expected return on the market is 10 percent. If a particular stock that you
consider has a Beta of 0.7.

What is its expected return based on the CAPM?

Answer
Because the expected return on the market is 16 percent, the market risk premium
is ………..

The first stock has a beta of ……, so its expected return is ………..
Question3

Calculating Portfolio Betas

You own a stock portfolio with the following shares:

 25 percent in Stock Q,
 20 percent in Stock R,
 15 percent in Stock S, and
 40 percent in Stock T.

The Betas for these four stocks are 0.84, 1.17, 1.11, and 1.36, respectively. What is
the portfolio beta?

Answer

The beta of a portfolio is the sum of the weight of each asset times the beta of each
asset. So, the beta of the portfolio is:

Beta (portfolio) = ……………

Question 4

WACC
The company financed 70% by equity and 30% by debt.

The company has an after-tax cost of debt of 6% and an equity beta of 1.2.

The risk-free rate of return is 4% and the market rate of return is 9%.

What is the after-tax weighted average cost of capital of the Company?

Answer

WACC = (1 − Tc)*rD*D/V + rE*E/V

Cost of equity = ……..

WACC = ………..