Total Risk= Specific Risk + Market Risk

Specific Risk can be elimintae dthrugh diversification

S&P is always Market
Beta is how your portfolio behavis towards the market
A stocks beta measures: sensitivity comparedto market
If Beta = 1, behaves just like S&P (market), if beta is >1 more risky than market (you need higher risk premium), if beta is < S&P its less risky
The beta of your portfolio will be an average of the betas of the securities in your ortfolio
Market Risk Premium= Difference between market return and return on risk free Treasury Bills

What is the Beta of a 3-stock portfolio?

#1 A B C
% in Stock 25% 40% 35%
Beta 0.9 1.05 1.73
0.225 0.42 0.6055
Beta of Stocks 1.2505

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be more profitable to invest in:
High Beta Stocks

Stock Makret (RM) 10% Stock Makret (RM)

Risk Free Rate 3% Risk Free Rate
Beta 0.5 Beta
(rm-rf) What is Risk Premium? 7% (rm-rf) What is Risk Premium?
(r*RP= Risk Preium on any Asset 3.500% (r*RP= Risk Preium on any Asse
Expected Return on stock? 6.500% Expected Return on sto

Cost of capital 17%

A project with higher than average risk offers an expected return of 14%. Which statement is correct if the company's opportunity cost of cap

Expected Return 14%

Company Oppourtunity Cost of Capital 12%
Project Opportunity Cost of Capital 15%
um), if beta is < S&P its less risky compare dto market

e profitable to invest in:

9%
4%
1.24
5%
6.696%
10.50%

ompany's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?