Module 4 Problem Set 1 Part C - If a stock has a beta of 0.78 would

 

Module 4 Problem Set 1 Part C

Part 3 Problems:

 

1. If a stock has a beta of 0.78 would its required rate of return be higher or lower than the required return for the average stock on the market? Why? Would it be more or less risky than holding a fund that replicated the S&P 500 Index ? Why?

2. The nominal risk free rate (RRF) equals 0.55%. The market risk premium is equal to 6.0%. The Beta of Harrah’s Inc is 1.33. Use the CAPM to calculate the required rate of return for Hershey stock (Rs)?

3. If you are a risk-averse investor and you decide to hold a single stock, which stock would you prefer? Use the Coefficient of Variation (CV) to determine your answer. Explain your final choice.

 

a.            a.            A stock with an expected return of 20% and a standard deviation equal to 10%.

b.            b.            A stock with an expected return of 7% and a standard deviation equal to 3%.

c.             c.             A stock with an expected return of 16% and a standard deviation equal to 16%

 

 

4. Assume you have a portfolio with the stocks and their information:

Stock     Total $ invested Beta       Expected Return              Portfolio weight

DuPont $125,000              1.00        12%       

McDonald’s Corp              $150,000              0.55        8.6%     

Ford       $600,000              1.33        11%       

 

 

a.            a)            Calculate Beta of the Portfolio.

b.            b)            Calculate the Expected return for the portfolio using the CAPM and the beta value for the portfolio. Assume the market risk premium (Rm – Rrf) equals 6% and the Risk free rate (Rrf) equals the rate on a 2 year treasury 1.25%.