Problems about:The Meaning and Measurement of Risk

Problem 6-1: Portfolio

B

eta

(Chapter 6)

Your investment club has 3 stocks in its portfolio, as follows:

Amount

Invested

Beta

20,000

0.6

40,000

1.6

1.2

What is the portfolio’s beta?

Problem 6-2 Rate of return

BB Corporation’s stock has a beta of 1.2. The risk-free rate is

5%

and the

expected return on the market is 13%. What is the required rate of return

on BB Corporation’s stock?

Problem 6-3 CAPM

Suppose the risk-free rate is

4%

and the market risk premium is 8%.

What is the required rate of return on (1) the market, (2) a stock with a beta

of .8, and (3) a stock with a beta of 1.8?

Problem 6-4 Calculating beta

Given the following:

Rate of return on Company Z

16%

Market rate of return

12%

Risk free rate

1. Calculate Company Z’s beta

2. If Company Z’s beta is 2.2, what would be the new required rate of return

Problem 6-5 Portfolio rate of return

Suppose you manage a portfolio that consists of the following stocks:

Stock

Investment

500,000

0.8

2,250,000

1.4

1,750,000

-0.7

D

1,500,000

1.3

If the market’s required rate of return is 12% and the risk-free rate is 3%, what

is the fund’s required rate of return?

Problem 6-6 Standard deviation

Given the following information, calculate the expected return for the portfolio and the standard deviation. SHOW your work.

DATA

Probability

Returns

0.40

0.30

7%

0.20

0.10

20%

Problem 6-7 Holding period gain

Suppose you purchased 40 shares of XYZ stock for SAR 350.00 on February 1.

You sell the 40 shares of stock on October 1 of the same year for 672.40.

No dividends were paid during the year.

1. Calculate the holding period gain

2. Calculate the holding period return