The same average return as the market portfolio

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Reference no: EM132065283

DIVERSIFICATION -

(A) You currently own a mutal fund that has a beta of 1 and pays the same average return as the market portfolio. Hoping to lower your risk exposure, you decide to sell the fund and invest all of the proceeds in one stock that has a beta of 0.8. Have you succeeded in lowering your risk exposure? Assume this stock's return is consistent with Capital Asset Pricing Model (CAPM), why is the expected return to this stock is paying too low for the risk it is imposing on you? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

CAPITAL ASSET PRICING MODEL -

(B) Use Capital Asset Pricing Model (CAPM), to calculate the expected return on a stock that has a beta of 0.25 if the risk-free rate is 3 percent and the market portfolio is expected to pay 11 percent. Why would an investor willingly accept a return that was considerably lower than the expected return on the market portfolio? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

WEIGHTED AVERAGE COST OF CAPITAL -

(C) Company A has a Weighted Average Cost of Capital (WACC) of 10.6 percent. Company B has a WACC of 12.3 percent. What could explain this difference? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

Reference no: EM132065283

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