Question

PQR Corporation has a Beta of 1.5. The risk-free rate is 6%, and the market risk premium is 9%. What is the required rate of return of PQR?

Josh has a portfolio of two stocks, Stocks A has a Beta of 2.4 and stock B has a Beta of 0.9. Funds are allocated with 60% in Stock A and 40% in Stock B. If the T-bill rate is 4%, and the market expected return is 13%, what is the required return on the portfolio?

A stock provides the following returns:

Year 1 6%
Year 2 10%
Year 3 -6%

What is the geometric average return?

Answer 1

1. Using CAPM, the required return is;

Required return = risk free rate + beta * market risk premium

= 6% + 1.5 * 9%

= 19.5%

2. First find the portfolio beta which is a weighted average of the individual betas;

= (60% * 2.4) + (40% * 0.9)

= 1.8

Now use CAPM

= risk free rate + beta * (Market return - risk free rate)

= 4% + 1.8 * (13% - 4%)

= 20.2%

3.Geometric average can be calculated by;

=( ((1 + r1) * (1 + r2) * (1 + r3)) ^1/n) - 1

= (((1 + 6%) * (1 + 10%) * (1 - 6%)) ^ 1/3) - 1

= ‭(1.09604‬^1/3) - 1

= 3.1%