Question

7) Your financial portfolio is comprised of the following three stocks for which your $ investment, their betas and returns are given:
Investment Value Beta Return Stock A $4,000 0.5 5.5% Stock B $5,000 1.2 9% Stock C $1,000 1.5 10.5%
a) What is the beta of your portfolio? b) If the risk-free rate of return is 3% and the market portfolio return is 8%, what is your portfolio return?
8) IBM has outstanding bonds with 8% annual coupon rate, that pays interest semiannually. Par value of these bonds are $1,000 and they were issued 7 years ago, at the time, with a 30-year maturity (remember that N is the time-to-maturity). a) If similar bonds have 9% return, how much would you be willing to pay for this bond? b) If the bond is currently selling for $950, what would your annual Yield-to-Maturity be if you were to buy it at this price?

Answer 1

7)

A)

Attaching the calculations and formulas used :-

Portfolio beta = 0.95

b)

Portfolio return will be computed using CAPM formula as follows :-

Return = Risk-free rate + (Market Return - Risk-free rate) * Portfolio beta

= 3% + (8% - 3%) * 0.95 = 7.75%

Hence, Portfolio return = 7.75%