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2 = 712.44; = 26.69%.
CV =
5-2
26.69%
= 2.34.
11.40%
Investment
$35,000
40,000
Total $75,000
Beta
0.8
1.4
5-3
5-4
5-5
=
=
=
=
(16%
5-6
a. k
Pk
i
i1
(k
)2 P .
k
i
i 1
2. kM decreases to 13%:
ki = kRF + (kM - kRF)bi = 9% + (13% - 9%)1.3 = 14.2%.
5-8
$142,500
$7,500
(b) +
(1.00)
$150,000
$150,000
1.12 = 0.95b + 0.05
1.07 = 0.95b
1.1263 = b.
= 1.12/0.05 = 22.4.
1.0 =
21.4, so the beta of the portfolio excluding this stock is b =
21.4/19 = 1.1263. The beta of the new portfolio is:
1.1263(0.95) + 1.75(0.05) = 1.1575 1.16.
5-9
$400,000
$600,000
(1.50) +
(-0.50)
$4,000,000
$4,000,000
$1,000,000
$2,000,000
+
(1.25) +
(0.75)
$4,000,000
$4,000,000
bp =
(0.1)(1.5)
+
(0.15)(-0.50)
+
(0.25)(1.25)
Portfolio beta =
(0.5)(0.75)
= 0.15 - 0.075 + 0.3125 + 0.375 = 0.7625.
kp = kRF + (kM - kRF)(bp) = 6% + (14% - 6%)(0.7625) = 12.1%.
Alternative solution:
First, calculate the return for each stock
using the CAPM equation [kRF + (kM - kRF)b], and then calculate the
weighted average of these returns.
kRF = 6% and (kM - kRF) = 8%.
Stock
A
B
C
D
Total
Investment
$ 400,000
600,000
1,000,000
2,000,000
$4,000,000
Beta
1.50
(0.50)
1.25
0.75
Weight
0.10
0.15
0.25
0.50
1.00
5-10
5-11
X = 10%.
d. kX = 10.5%; k
kY = 12%; k Y = 12.5%.
Stock Y would be most attractive to a diversified investor since
its expected return of 12.5% is greater than its required return
of 12%.
e. bp = ($7,500/$10,000)0.9 + ($2,500/$10,000)1.2
= 0.6750 + 0.30
= 0.9750.
kp = 6% + 5%(0.975)
kp = 10.875%.
f. If RPM increases from 5% to 6%, the stock with the highest beta
will have the largest increase in its required return. Therefore,
Stock Y will have the greatest increase.
Check:
kX = 6% + 6%(0.9)
= 11.4%.
Increase 10.5% to 11.4%.
kY = 6% + 6%(1.2)
= 13.2%.
5-12
5-13
5-14
In equilibrium:
= 12.5%.
kJ = k
J
kJ = kRF + (kM - kRF)b
12.5% = 4.5% + (10.5% - 4.5%)b
b = 1.33.
5-15
bHRI = 1.8;
bLRI = 0.6.
No changes occur.
kRF = 6%.
kM = 13%.
Falls to 10.5%.
Now SML:
5-16
Bradford:
kB = kRF + (RPM)b
= 5% + (7.5%)1.45
= 5% + 10.875%
= 15.875%.
Farley:
kF = kRF + (RPM)b
= 5% + (7.5%)0.85
= 5% + 6.375%
= 11.375%.
The difference in their required returns is:
15.875% - 11.375% = 4.5%.
5-17
5-18
Step 1:
Step 2:
Step 3:
After additional investments are made, for the entire fund to have an
expected return of 13%, the portfolio must have a beta of 1.5455 as shown
below:
13% = 4.5% + (5.5%)b
b = 1.5455.
Since the funds beta is a weighted average of the betas of all the
individual investments, we can calculate the required beta on the
additional investment as follows:
($20,000,000)(1.5)
$5,000,000X
+
$25,000,000
$25,000,000
1.5455 = 1.2 + 0.2X
0.3455 = 0.2X
X = 1.7275.
1.5455 =
5-19
5-20
(given)
The
weights
are
the
= $160/$500 = 0.32
= $120/$500 = 0.24
= $80/$500 = 0.16
= $80/$500 = 0.16
= $60/$500 = 0.12
5-21
1998
1999
2000
2001
2002
Mean
Std. Dev.
Coef. Var.
kA
(18.00%)
33.00
15.00
(0.50)
27.00
kB
(14.50%)
21.80
30.50
(7.60)
26.30
11.30
20.79
1.84
11.30
20.78
1.84
Portfolio
(16.25%)
27.40
22.75
(4.05)
26.65
11.30
20.13
1.78