An investor puts $25,000 in a risk-free asset and $50,000 i

| June 12, 2016

Question

1.An investor puts $25,000 in a risk-free asset and $50,000 in the market portfolio. Compute the beta of his portfolio.

2. You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.88. What does the beta of the second stock have to be if you want the portfolio to have a beta of 0.87?

3. ABC Company’s last dividend was $2.8. The dividend growth rate is expected to be constant at 8% for 3 years, after which dividends are expected to grow at a rate of 4% forever. The firm’s required return (rs) is 14%. What is its current stock price (i.e. solve for Po)?

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