What must be the beta of a portfolio with E(rP) = 18%, if rf = 6% and E (rM) = 14%?

(Do not round intermedi

Round your answer to 1 decimal place.)

Beta of a portfolio  

βP =
%? (Do not round intermediate calculations.

E(rP) = rf + βP × [E(rM) – rf]

E(rP) =
rf =
βP =
E(rM) =
Are the following true or false?
a. Stocks with a beta of zero offer an expected rate of return of zero.      
True/False
b. The CAPM implies that investors require a higher return to hold highly volatile securities.
True/False

c. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and th
market portfolio.
True/False
e securities.

nt budget in T-bills and the remainder in the

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.      
Company $1 Discount Store Everything $5   

Forecasted return 12%            11%               

Standard deviation of returns 8%             10%               

Beta 1.5              1.0                

What would be the fair return for each company, according to the capital asset pricing model (CAPM)? (D
round intermediate calculations. Omit the "%" sign in your response.)
     Company Expected Return  
 
$1 Discount Store   %   

 Everything $5   %   

Answers:
Fair return for $1 Discount store =
Fair return for Everything $5 =
um is 6%.      
E(ri) = rf + βi × [E(rM) – rf]

rf =
E(rM) – rf =
βDiscount store
βEverything $%

pricing model (CAPM)? (Do not

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.

  Company $1 Discount Store Everything $5   

Forecasted return 12%            11%     

         
Standard deviation of returns 8%            10%     
         
Beta 1.5              1.0           
  
Characterize each company in the above table as underpriced, overpriced, or properly priced.

$1 Discount Store is .  

Everything $5 is .

Answers:
$1 Discount Store is

Everything $5 is
um is 6%.
CAPM calculations: CAPM Forecasted Return
Everything $5   

11%      $1 Discount Store 0.13 0.12

10%      Everything $5 0.1 0.11

  1.0           
roperly priced.

rf = 0.04
E(rM) – rf = 0.06
βDiscount store 1.5
βEverything $% 1
Two stocks have the following returns and Betas

Forecasted
Securities rate of Beta
return
A 0.11 1.20
B 0.06 0.70

If the expected market rate of return is 0.09 and the risk-free rate is 0.02, what is the excess return of each security and which w
urn of each security and which would be considered the better buy?
What is the expected rate of return for a stock that has a beta of 1.0 if the expected
return on the market is 15%?

a) 15%.
b) More than 15%.
c) Cannot be determined without the risk-free rate.

Answer:
cted
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the
following statements is most accurate?
The stock of Kaskin, Inc., has more total risk than Quinn, Inc.

The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.

The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.

Answer:
ch of the

t of Quinn, Inc.
Two stocks have the following returns and Betas

Forecasted
Securities rate of Beta
return
A 0.09 0.80
B 0.11 1.00

If the expected market rate of return is 0.06 and the risk-free rate is 0.03, what is the excess return of each security and which w
urn of each security and which would be considered the better buy?
You are a consultant to a large manufacturing corporation that is considering a project with the follow
after-tax cash flows (in millions of dollars):

Years from Now After-Tax Cash Flow     

0 –40  
1–10 15   

The project's beta is 1.2. Assuming that rf = 8% and E(rM) = 16%, what is the net present value of the p
What is the highest possible beta estimate for the project before its NPV becomes negative?

Answer:

NPV (the short way) $0.00

NPV the long way:

(1+cost-
of-capital)
Year (time ^ time discount Present
period) Cash flow period factor value
0
1
2
3
4
5
6
7
8
9
10
NPV
 project with the following net

E(rM)
rf =
E(rM) – rf =
present value of the project? βProject
mes negative? Discount rate
Yrs CF
0 -40
1-10 15
 If the simple CAPM is valid, say whether the situation is possible or not?

Portfolio Expected Return Beta

A 20 1.4

B 25 1.2

Possible
Not possible

Answer:
 If the simple CAPM is valid, say whether the situation is possible or not?
Portfolio Expected Return Standard Deviation

A 30 35

B 40 25
Possible
Not possible

Answer:
Two stocks have the following returns and Betas

Forecasted
Securities rate of Beta
return
A 0.09 0.90
B 0.09 1.20

If the expected market rate of return is 0.07 and the risk-free rate is 0.01, what is the excess return of each security and which w
urn of each security and which would be considered the better buy?
If the simple CAPM is valid, say whether the situation is possible or not?

Portfolio Expected Return Standard Deviation       

Risk-free 10   0 
     
Market 18 24
A 16 12

Possible

Not possible

Answer:
SA =

SM =

Portfolio ER SD

Mkt

Risk-free
Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A
share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is
1.2. What do investors expect the stock to sell for at the end of the year? (Do not round intermediate
calculations. Omit the "$" sign in your response.)
  
  Expected stock price $  

Expected Stock Price

on the market is 16%. A
d of the year. Its beta is E(r)M
t round intermediate
D1
P1
P0
βS =
E(r)S
rf =
 Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A s
has an expected rate of return of 4%.
a) What is its beta? (Negative value should be indicated by a minus sign. Do not round intermediate calculatio
Round your answer to 1 decimal place.)
b) The expected rate of return is less than the risk-free rate. Does this mean that the stock is risk-free?
  
  Beta  

Answer:

a)
b)
on the market is 16%. A stock Inputs
E(r)M
und intermediate calculations.

tock is risk-free?

βS =
E(r)S
rf =
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%.
Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is
12%. According to the capital asset pricing model:
 

a. What would be the expected rate of return on a stock with β = 0? (Omit the "%" sign in your response.)
 
  Expected rate of return %    
b. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next
year and you expect it to sell then for $41. The stock risk has been evaluated at β = –.5. Is the stock
overpriced or underpriced?

Overpriced
Underpriced

Answers:

a.
b
 e risk-free) is about 5%.
tfolio with a beta of 1 is Fair E(r)
E(r)
P0
%" sign in your response.) P1
D1
βS =
o pay $3 dividends next rf =
β = –.5. Is the stock
E(r)M

Actual E(r)
 You invest 65% of your money in security A with a beta of 1.2 and the rest of your money in security B with a beta
of 0.7. What is the beta of the resulting portfolio?

Answer:
ity B with a beta Proportion
βa =
βb=
βp =
 If the risk-free rate is 3% and the expected market rate of return is 13% and you have identified a security with a
beta of 1.3 to offer a rate of return of 15%, is the security correctly priced, underpriced or overpriced according to
the CAPM? Justify your answer with calculations.

Answer:
security with a E(rP) = rf + βP × [E(rM) – rf]
ced according to

actual E(rP) =
rf =
βP =
E(rM) =
fair E(rP) =