Tutorial 3 – Risk and Return (Part 2)

1) The expected return for the market portfolio is 13%, the expected return on U.S. Treasury
Bills is 2%, and the expected return on AAA-rated short-term corporate bonds is 7%.
Calculate the required return for a stock with a beta equal to 1.5.

2) If you hold a portfolio made up of the following stocks:

Investment Value Beta
Stock A$8,000 1.5
Stock B$10,000 1.0
Stock C$2,000 .5

What is the beta of the portfolio?

3) Use the following data:

Market risk premium = 10%
Risk free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.

What is the required return of your portfolio? Show all work.

4) Bankers Corp has a very conservative Beta of 0.7, while Biotech Corp has a Beta of 2.1.
Given that the T-bill rate is 5%, and the market is expected to return 15%, what is the
required return of Bankers Corp, Biotech Corp, and a portfolio composed of 60% of
Bankers Corp and 40% Biotech Corp?

5) Suppose you are the money manager of a $4 million investment fund. The fund consists of
4 stocks with the following investments and betas:
Stock Investment Beta
($)
A 400,000 1.50
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75

If the market required rate of return is 14% and the risk-free rate is 6%, calculate the fund’s
required rate of return.
6) An investor currently holds the following portfolio:
Amount Invested Beta
8,000 shares of Stock A $16,000 1.3
15,000 shares of Stock B $48,000 1.8
25,000 shares of Stock C $96,000 2.2

If the T-bills return is 4% and the market risk premium is 9%, calculate the required return
on the portfolio for the investor.

7) You hold a portfolio with the following securities:

Percent Expected
Security of Portfolio Beta Return

Able Corporation 20% 3.20 36.0%

Baker Corporation 40% 1.60 20.0%
Charlie Corporation 40% .20 6.0%

What is the required return for the market portfolio given risk-free rate of 5% according to
the CAPM?

8) Redesign Corp is considering a new strategy that would increase its expected return from
12% to 13.9%, but would also increase its beta from 1.2 to 1.8. Given the risk free rate is
5% and the return on the market portfolio is expected to be 10%, calculate the required
return for both current and new strategy. Explain whether Redesign Corp should change its
strategy or not.

9) Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a
correlation coefficient with the market of -0.3, and a beta coefficient of -0.5. Stock B has
an expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with
the market, and a beta coefficient of 1.0. If you are a risk-averse investor, determine which
stock you will add in a diversified portfolio and which stock in a single-asset portfolio.