ANALYZING A PORTFOLIO
d 59. You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free
asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How
much needs to be invested in stock B if you want a portfolio beta of .90? d. $543
59. BetaPortfolio = .90 = ($400 $1,000 1.3) + ($x $1,000 .7) + (($600 – x) $1,000
0) = .52 + .7x + 0; .7x = .38; x = $542.86 = $543
EXPECTED RETURN
c 60. You recently purchased a stock that is expected to earn 12 percent in a booming
economy, 8 percent in a normal economy and lose 5 percent in a recessionary
economy. There is a 15 percent probability of a boom, a 75 percent chance of a
normal economy, and a 10 percent chance of a recession. What is your expected
rate of return on this stock? c. 7.30 percent
60. E(r) = (.15 .12) + (.75 .08) + (.10 -.05) = .018 + .06 − .005 = .073 = 7.3
percent
EXPECTED RETURN
b 62. You are comparing stock A to stock B. Given the following information, which one
of these two stocks should you prefer and why? Rate of Return if
State of Probability of State Occurs
Economy State of Economy Stock A Stock B
Boom 60% 9% 15%
