Computation of beta of the firm and market portfolio

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Reference no: EM1311513

1. Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%.

a) Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down?

b) Calculate the beta of a firm that goes up on average by 18% when the market goes down and goes down by 22% when the market goes up.

c) Calculate the beta of a firm that is expected to go up by 4% independently of the market.

2. Suppose the risk-free interest rate is 4%.

a) i. Use the beta you calculated for the stock in Problem 1 (a) to estimate its expected return.

ii. How does this compare with the stock's actual expected return?

b) i. Use the beta you calculated for the stock in Problem 1 (b) to estimate its expected return.

ii. How does this compare with the stock's actual expected return?

3. Suppose the market risk premium Is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.

Reference no: EM1311513

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