Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate|My homework helper

Posted: February 19th, 2023

FOR THIS week Assignment, you will submit your written answers to questions and calculated

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The weekly assignment should have an APA title page, an APA reference page, and in-text citations.

Chapter 8

Question 8-4

Problem 8-2

Problem 8-7

Problem 8-17

QUESTION

8-4 Is it possible to construct a portfolio of real-world stocks that has a required return equal to the

risk-free rate? Explain.

PROBLEMS

8-2 PORTFOLIO BETA An individual has $20,000 invested in a stock with a beta of 0.6 and another

$75,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio,

what is her portfolio’s beta?

8-7 PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a $4.82 million

investment fund. The fund consists of four stocks with the following investments and betas:

STOCK Investment Beta

A $ 460,000 1.50

B 500,000 (0.50)

C 1,260,000 1.25

B 2,600,000 0.75

If the market’s required rate of return is 8% and the risk-free rate is 4%, what is the fund’s required

rate of return.

8-17 PORTFOLIO BETA A mutual fund manager has a $20 million portfolio with a beta of 1.7.

The risk-free rate is 4.5%, and the market risk premium is 7%. The manager expects to receive an

additional $5 million, which she plans to invest in a number of stocks. After investing the additional

funds, she wants the fund’s required return to be 15%. What should be the average beta of the new

stocks added to the portfolio?

 

SOLUTION

APA TITLE PAGE:

[Your Name]
[Your Instructor’s Name]
[Course Name and Number]
[Date]

APA REFERENCE PAGE:

[Include any references used in answering the questions and solving the problems.]

IN-TEXT CITATIONS:

[Include in-text citations for any sources used in answering the questions and solving the problems.]

QUESTION 8-4:

It is not possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate. The risk-free rate is the minimum return that investors expect from an investment that has no risk, such as a U.S. Treasury bill. On the other hand, stocks have a risk premium, which is the additional return that investors require for taking on risk. Therefore, the expected return on a portfolio of stocks should be higher than the risk-free rate.

PROBLEM 8-2:

The portfolio’s beta can be calculated using the formula:

Portfolio beta = (Amount invested in stock 1 / Total portfolio value) x Beta of stock 1 + (Amount invested in stock 2 / Total portfolio value) x Beta of stock 2

Substituting the given values:

Portfolio beta = (20,000 / (20,000 + 75,000)) x 0.6 + (75,000 / (20,000 + 75,000)) x 2.5

Portfolio beta = 1.56

Therefore, the portfolio’s beta is 1.56.

PROBLEM 8-7:

The portfolio’s required rate of return can be calculated using the formula:

Portfolio required rate of return = Risk-free rate + Portfolio beta x (Market risk premium)

Substituting the given values:

Portfolio required rate of return = 4% + (0.5 x 1.5 x 8%) + ((-0.5) x (-0.5) x 8%) + (1.25 x 1 x 8%) + (0.75 x 0.5 x 8%)

Portfolio required rate of return = 9.75%

Therefore, the fun

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