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##### Finance Assignment Problem

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Question;Stock Price Weight (% of Total) Each Stock's BetaStock A $72.00 20.0988% 1.25Stock B $41.15 11.4870% 1.33Stock C $70.80 19.7638% 1.34Stock D $86.91 24.2609% 1.28Stock # $87.37 24.3894% 1.16Total $358.23 100.0000% Instructions 1. Weight the portfolio. I weighted it on each current stock price (column C) as a percentage of aggregate stock price (column D). (a) Should I use an average stock price over a certain period instead? (b) Is my weighting method correct? 2. Calculate the portfolio's beta. I list each stock's current beta per Yahoo Finance (column E) and multiply each stock's beta by that stock's weight from column D. The weighted beta (cell F8) is 1.25. Did I do this correctly? 3. Use the Capital Asset Pricing Model to estimate the required rate of return. I am lost on this. 3(a) What is the best choice for risk-free rate of return? The current yield on the 3-month Treasury bill is 0.01, which seems too low to be useful. The current yield on the 10-year Treasury bond is 2.24, which seems like a better choice. 3(b) For beta, should I use each stock's actual beta (column E), each stock's weighted beta (column F), or the 1.26 beta I calculated for the entire portfolio? All 5 companies are software firms. 3(c) Our textbook always provides the market risk premium. In this real-world scenario, how do I estimate the market risk premium? 4. Calculate expected rate of return. 4(a) The textbook has spoiled me by always giving a percentage decrease or increase for depression, recession, normal market, and boom market. How does one estimate these percentages in real life? For instance, all 5 of my companies are software firms. Would I base the recession, normal, and boom rates of return on historical data? (And if so, what period of time would you recommend? 2008 would probably be good for the recession percentage. 4(b) Starting in cell B25 is a table based on hypothetical expected rates of return.

Paper#48112 | Written in 18-Jul-2015

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