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    Jimenez - Act 3 Finals

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    Angel Kaye Nacionales Jimenez
    The document contains 3 practice problems related to calculating required rates of return using the Capital Asset Pricing Model (CAPM). Problem 1 calculates the new required rate of return for a stock when the market risk premium increases. Problem 2 calculates the required rate of return for a new portfolio with different asset allocations and betas. Problem 3 calculates the required rate of return for a hedge fund portfolio with different holdings and weighted betas.

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    Jimenez - Act 3 Finals

    Uploaded by

    Angel Kaye Nacionales Jimenez
    134 views4 pages
    The document contains 3 practice problems related to calculating required rates of return using the Capital Asset Pricing Model (CAPM). Problem 1 calculates the new required rate of return for a stock when the market risk premium increases. Problem 2 calculates the required rate of return for a new portfolio with different asset allocations and betas. Problem 3 calculates the required rate of return for a hedge fund portfolio with different holdings and weighted betas.

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    The document contains 3 practice problems related to calculating required rates of return using the Capital Asset Pricing Model (CAPM). Problem 1 calculates the new required rate of return for a stock when the market risk premium increases. Problem 2 calculates the required rate of return for a new portfolio with different asset allocations and betas. Problem 3 calculates the required rate of return for a hedge fund portfolio with different holdings and weighted betas.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    134 views4 pages

    Jimenez - Act 3 Finals

    Uploaded by

    Angel Kaye Nacionales Jimenez
    The document contains 3 practice problems related to calculating required rates of return using the Capital Asset Pricing Model (CAPM). Problem 1 calculates the new required rate of return for a stock when the market risk premium increases. Problem 2 calculates the required rate of return for a new portfolio with different asset allocations and betas. Problem 3 calculates the required rate of return for a hedge fund portfolio with different holdings and weighted betas.

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    © All Rights Reserved
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    of 4

    Jimenez, Angel Kaye BSA-2nd Year September 28, 2020

    ACC 216 9:45-11:45

    CAPM: Portfolio Beta; Required Rates of Return

    Instruction: Determine the correct answer from the given choices. Show supporting computations.

    Problem 1

    Mikkelson Corporation's stock had a required return of 11.75% last year, when the risk-free rate was
    5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the
    market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the
    company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

    a. 14.38%

    b. 14.74%

    c. 15.11%

    d. 15.49%

    e. 15.87% Given:
    Given: Risk-free rate = 5.50%
    Risk-free rate = 5.50% Beta = 1.315789
    Old market risk premium = 4.75% New market risk premium = 6.75%
    Old required return = 11.75% New required return = ?
    (𝒐𝒍𝒅 𝒓𝒆𝒕𝒖𝒓𝒏 − 𝑹𝒇 )
    𝒃= 𝑁𝑒𝑤 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑅𝑅𝐹 + (𝑏)(𝑅𝑃𝑀 )
    𝒐𝒍𝒅 𝑹𝑷𝑴
    𝑁𝑒𝑤 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 5.50% + (1.32)(6.75%)
    (𝟏𝟏. 𝟕𝟓% − 𝟓. 𝟓𝟎%)
    𝒃= 𝑁𝑒𝑤 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 5.50% + 8.881575%
    𝟒. 𝟕𝟓
    𝟔. 𝟐𝟓 𝑁𝑒𝑤 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 14.38158
    𝒃=
    𝟒. 𝟕𝟓
    𝒃 = 𝟏. 𝟑𝟏𝟓𝟕𝟖𝟗
    𝒃 = 𝟏. 𝟑𝟐
    Problem 2

    Assume that you manage a P10.00 million mutual fund that has a beta of 1.05 and a 9.50% required
    return. The risk-free rate is 4.20%. You now receive another P5.00 million, which you invest in stocks with
    an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first
    find the market risk premium, then find the new portfolio beta.)

    a. 8.83%

    b. 9.05%

    c. 9.27%

    d. 9.51%

    e. 9.74%

    Given Given:
    Old funds = $10,000,000 New portfolio Required Return =?
    New funds (millions) = $5,000,000 Old portfolio's beta =1.05
    Required return, old stocks = 9.50% New stocks' beta =0.650
    Risk-free rate = 4.20% New portfolio beta =0.9167
    Old Beta = 1.05

    𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝑟𝑅𝐹 + (𝑏)(𝑅𝑃𝑀 ) 𝑁𝑒𝑤 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑟𝑅𝐹 + (𝑛𝑒𝑤 𝑏𝑒𝑡𝑎)(𝑅𝑃𝑀 )
    9.5% = 4.2% + (1.05)(𝑅𝑃𝑀 ) 𝑁𝑒𝑤 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 4.20% + (0.9167)(5.05)
    9.5% − 4.2%
    𝑅𝑃𝑀 = 𝑁𝑒𝑤 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 4.20% + 4.629335
    1.05
    𝑁𝑒𝑤 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 8.829335
    𝑹𝑷𝑴 = 𝟓. 𝟎𝟓%
    𝑵𝒆𝒘 𝑷𝒐𝒓𝒕𝒇𝒐𝒍𝒊𝒐 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒅 𝑹𝒆𝒕𝒖𝒓𝒏 = 𝟖. 𝟖𝟑

    New Portfolio Beta

    Funds Weighted Beta New Portfolio Beta


    a b = a / Total Amount c bxc
    Old 10 million (10M / 15M) = 2/3 1.05 0.7
    New 5 million (5M / 15M) = 1/3 0.65 0.2167
    Total 15 million New Portfolio Beta = 0.9167
    Problem 3

    Assume that you are the portfolio manager of the SF Fund, a P3 million hedge fund that contains the
    following stocks. The required rate of return on the market is 11.00% and the risk free rate is 5.00%.
    What rate of return should investors expect (and require) on this fund?

    Stock Amount Beta

    A P1,075,000 1.20

    B 675,000 0.50

    C 750,000 1.40

    D 500,000 0.75

    P3,000,000

    a. 10.56% b. 10.83% c. 11.11% d. 11.38% e. 11.67%

    Given:

    Required market return = 11.00%

    Risk free rate = 5.00%

    𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝑅𝑀 + 𝑟𝑅𝐹

    𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 11% + 5%

    𝑴𝒂𝒓𝒌𝒆𝒕 𝑹𝒊𝒔𝒌 𝑷𝒓𝒆𝒎𝒊𝒖𝒎 = 𝟔%


    New Portfolio Beta

    Stock Amount Weighted Beta New Portfolio Beta


    a b c = b / Total Amount d e=cxd
    A P1,075,000 (1.75M / 3M) = 43/120 1.20 0.43
    B 675,000 (675K / 3M) = 9/40 0.50 0.1125
    C 750,000 (750K / 3M) = 1/4 1.40 0.35
    D 500,000 (500K / 3M) = 1/6 0.75 0.125
    P3,000,000 New Portfolio Beta = 1.0175

    𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 ′ 𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑟𝑅𝐹 + (𝑏)(𝑅𝑃𝑀 )


    𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 ′ 𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 5% + (1.0175)(6%)

    𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 ′ 𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 5% + 6.105


    𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 ′ 𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = 11.105

    𝑷𝒐𝒓𝒕𝒇𝒐𝒍𝒊𝒐′ 𝒔 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒅 𝑹𝒆𝒕𝒖𝒓𝒏 = 𝟏𝟏. 𝟏𝟏

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