Question

Given the following data for a stock: beta = 1.4; risk-free rate = 3%; market rate of return = 13%; and expected rate of return on the stock = 15%. Then the stock is:

		below the Security Market Line
		on the Security Market Line
		above the Security Market Line
		it cannot be determined

1. You own a portfolio of two stocks, O and Q. Stock O is valued at $4,000 and has an expected return of 10.5 percent. Stock Q has an expected return of 18.7 percent. What is the expected return on the portfolio if the portfolio total value is $5,000?

   		11.73 percent
   		10.92 percent
   		12.14 percent
   		13.03 percent

1. Cornel Co. has a beat of 1.4. If the risk-free rate is 3% and the market return is 12%, what is its cost of equity assume CAPM?

   		18.0%
   		16.5%
   		15.6%
   		17.6%

Answer 1

Question 1

using Capital Asset Pricing Model

Required Return = Rf + b ( Rm – Rf )

Where,

Rf – Risk free return = 3%

b – Beta = 1.4

Rm – Expected return on market portfolio = 13%

Required Return = 3+1.4*(13-3)

= 3+14

= 17.00%

expected rate of return on the stock = 15%

expected rate of return on the stock = 15% < Required Return =17%, stocks are below the Security Market Line

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