Practice Problems #10

APEC3501

1. What is the expected return for the following stock? [.080]

State Probability E(Ri)
Average .55 .20
Recession .20 .10
Depression .25 -.20

2. What is the variance? [.0673]

State Probability E(Ri)
Boom .15 .6
Good .50 .2
Recession .25 -.1
Depression .10 -.3

3. What is the expected portfolio return given the following information: [18.75%]
Asset Port. Weight E(Ri)
A .25 15%
B .25 20%
C .30 10%
D .20 35%

4. What is the expected return on asset A if it has a beta of .3, the expected market return is 14%, and
the risk-free rate is 5%? [7.7%]

5. What is the expected market return if the expected return on asset A is 16% and the risk-free rate is
7%? Asset A has a beta of 1.2. [14.5%]

6. Asset A has an expected return of 15%. The expected market return is 14% and the risk-free rate is
4%. What is Asset A's beta? [1.1]

7. Asset A has an expected return of 12% and a beta of 1.05. The risk-free rate is 4%. What is the
market risk premium? [7.6%]

8. Suppose you have a portfolio comprised of two securities. You have 40 shares of the first security,
at a price of $15 per share, and 200 shares of the second security at a cost of $2 per share. What is
the market value weight of the first security in the portfolio? [60%]

9. What is the portfolio beta with 125% in the market portfolio and the rest in a risk free asset? [1.25]

10. What is the portfolio beta that has equal weights of four assets: Asset A is the market portfolio,
Asset B has half the risk of Asset A, Asset C has twice the risk of Asset A, and Asset D is risk free.
[0.875]

11. Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk free rate is 5%. What is the
expected return on A? [16.25%]

(over)
12. You hold three stocks in your portfolio - stock A, stock B, and stock C. The portfolio beta is 1.50.
Stock A constitutes 20 percent of the dollar value of your holdings and has a beta of 1.0. If you sell
all of your investment in A and invest the proceeds in the risk free asset, your new portfolio beta
will be [1.300]

13. You own two risky assets, both of which plot on the security market line. Asset A has an expected
return of 12% and a beta of .8. Asset B has an expected return of 18% and a beta of 1.4. If your
portfolio beta is the same as the market portfolio, how much do you have invested in Asset A? [.67]

14. Given the following information, what is the portfolio standard deviation? [.0703]
State Prob. of State Rp
Boom .2 .30
Good .6 .21
Recession .2 .08

15. What is the beta for the following portfolio? [.90]

Stock Investment Beta
A 15,000 0.6
B 10,000 0.9
C 25,000 1.6
D 12,500 1.1
E 17,500 0.0

16. You form a portfolio by investing equally in A, B, the risk-free security and the market portfolio.
What is the beta of your portfolio? βA = .8 and βB = 1.2. [0.75]

17. Which of the following stocks has the greatest expected return and by how much? [A by 3%]
State Prob. of State Return for State
Stock A Stock B
Boom .1 .6 .4
Good .8 .3 .3
Recession .1 0 -.1

18. Use the following to answer the next four problems.

Security Return Standard Deviation Beta
A 15% 8% 1.2
B 12% 14% 0.9
Rf 5%

a. With regard to securities A and B only, which security has the smaller total risk? Which security
has the smaller systematic risk? [A; B]
b. If you were to form a portfolio consisting of 75% investment in security A and 25% in security B,
what would be the value of the systematic risk for the portfolio? [1.13]
c. What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B and
40% in the risk free asset? [10.1%; 0.63]
d. What is the portfolio expected return with 125% invested in A and the remainder in the risk free
asset? [17.5%]