CORPORATE FINANCE
CORPORATE FINANCE
12th Edition
ISBN: 9781307702804
Author: Ross
Publisher: MCG/CREATE
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Chapter 12, Problem 6QAP

a

Summary Introduction

Adequate information:

Expected return of Stock A ERA = 10.5%

Expected return of Stock B ERB = 13%

Expected return of Stock C ERC = 15.7%

Expected return of the market ERM = 14.2%

Beta of Stock A βA = 1.20

Beta of Stock B βB = 0.98

Beta of Stock C βC = 1.37

Beta of the market βM = 1

To compute: Market model equation for each stock.

Introduction: The market model equation for a stock is a mathematical equation consisting of the expected return, beta, market return, expected market return, and the unsystematic risk of the stock.

b

Summary Introduction

Adequate information:

Weight of Stock A WA = 30%

Weight of Stock B WB = 45%

Weight of Stock C WC = 25%

To compute: Return on the portfolio

Introduction: The return on portfolio refers to the weighted average return on each of the stocks in the investment portfolio.

c

Summary Introduction

Adequate information:

Return on the market RM = 15%

To compute: Return on each stock and portfolio

Introduction: The return on portfolio refers to the return on each of the stocks proportionately as per their weightage in the portfolio.

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