Stock A has an expected return of 11.4%, a beta of 1.2, and a standard deviation of 16%. Stock B has a beta of 1.0, expected return is 10% and its standard deviation is 20%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks’ returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT?

You have $80,000 invested in a mutual fund that closely replicates the S&P 500 Index.  Your new job offer has a $20,000 signing bonus that you will use to add to your investment portfolio.  All your bonus money will be invested in Johnson & Johnson (ticker: JNJ) which has a beta of 0.73.  Assume no other changes are made to your portfolio.   The risk free rate is 1.6% and the market risk premium is 8.84%.  How much will your required return increase or decrease if you make the investment in Johnson & Johnson?  

An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.

Jacob manages a $10.00 million mutual fund which has a beta of 1.05 and 9.50% required return. The risk-free rate is 4.20%. Jacob now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the portfolio’s beta after the additional investment is made?

Kuro’s stock price is currently $144.80 and its beta is 1.2.  It is widely accepted that the current risk-free rate is 3% and the market risk premium is 6%.  You believe that the stock price will be $157.70 in one year.  The company does not pay dividends.  Based on the given information, is Kuro’s stock currently undervalued?  Explain. 

Please use the following Excel file to do your work for this exam.  You will need to submit it at the end of this exam.  I will use it to assign partial credit. excel for quiz.xlsx 

There is concern about rising inflation post-COVID.  The increase in expected inflation has increased interest rates this year (rRF).  At the same time, the market risk premium has also increased.  Does this have a greater impact on the price of high or low beta stocks?

This course has three modules of chapters.

I am required to purchase the book (hard copy or electronic) noted in the syllabus.

I will need a webcam for this class.