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13. Using CAPM A stock has a beta of 1.5, the expected return on the market is Basic

14 percent, and the risk-free rate is 5 percent. What must the expected return on (continued) this stock be?

14. Using CAPM A stock has an expected return of 13 percent, the risk-free rate is 5 percent, and the market risk premium is 7 percent. What must the beta of this stock be?

15. Using CAPM A stock has an expected return of 10 percent, its beta is .9, and the risk-free rate is 6 percent. What must the expected return on the market be?

16. Using CAPM A stock has an expected return of 14 percent, a beta of 1.6, and the expected return on the market is 11 percent. What must the risk-free rate be?

17. Using CAPM A stock has a beta of 1.1 and an expected return of 15 percent. A risk-free asset currently earns 5 percent.

a. What is the expected return on a portfolio that is equally invested in the two assets?

b. If a portfolio of the two assets has a beta of .6, what are the portfolio weights?

c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta?

d. If a portfolio of the two assets has a beta of 2.20, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.

18. Using the SML Asset W has an expected return of 17 percent and a beta of 1.4. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns against the betas. What is the slope of the line that results?

Percentage of Portfolio

Portfolio

Portfolio

in Asset W

Expected Return

Beta

0%

0 0

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