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The Terrapins Investment Fund has a total investment of $500 million in five stocks.

Stock               Investment (millions)   Beta

    1                              $150                   .6

    2                              120                1.2

    3                                  80                3.0

    4                                  90                1.8

    5                                  60                1.0

Total                            $500

1. What is the fund’s overall, or weighted average, beta?

2. Refer to the previous problem. If the risk-free rate is 12% and the market risk premium is 6%, what is the required return on the Terrapins Fund?

3. Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:

A. What is the expected return of MGM stock?

B. What is the expected return of AEP stock?

C. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?

D. What is the expected return of that portfolio with the beta that you found in part c.?

E. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92721525

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