1) You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills? (Hint: w1 +w2 = 100%)

(Formula: Portfolio beta = w1 * beta 1 + w2 *beta 2)

2) You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?
(Formula: Portfolio beta = w1 * beta 1 + w2 *beta 2 + w3*beta 3)

3) According to CAPM, which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Stock Beta Expected Realized Return

A .85 9.2%

B 1.08 11.8%

C 1.69 15.3%

D .71 7.8%

E 1.45 12.3%

4)You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $30. The stock's beta is 1.3, r_f is 6%, and market risk premium is 10%. What is the stock's alpha?

Answer rating: 100% (QA)

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