FINM7006: Applied Foundations of Finance
Tutorial 7 Questions
Question One
What is beta?
Question Two
You invest in two stocks. Stock A has a beta of 1.5 and stock B has a beta of 1.2. If you
invest 50% in each stock, what is the beta of your portfolio?
Question Three
What is the Capital Asset Pricing Model (CAPM)?
Question Four
Calculate the required rate of return for a risky asset with a of 0.75 given an expected
return on the market of 10% and a risk-free rate of 6%.
Question Five
What is the expected return on the market given a stock with a of 1.0 has a required
rate of return of 12% and the risk-free rate is 5%.
Question Six
Consider an investment opportunity available to a firm where the expected cash flows
are as tabulated below:
Year 0 1 2 … 5
E[Cash flow] –$100,000 $25,000 $25,000 … $25,000
This investment opportunity is in the same risk class as the other investments of the
firm. The expected return on the market is 11% p.a., the risk-free rate is 5% p.a. and the
firm has a of 1.25. Should the firm undertake this investment?
Question Seven
Assume now that the investment opportunity available to the firm in Question Six is in a
different industry to that of the firm’s normal operations. This industry is 30% less risky
than the firm’s industry. If the expected cash flows are as tabulated below, the expected
return on the market is 11% p.a., the risk-free rate is 5% p.a. and the firm’s is equal to
1.25, should the firm undertake the investment?
Year 0 1 2 … 5
E[Cash flow] –$100,000 $25,000 $25,000 … $25,000
Question Eight
You are analysing a share that has a beta of 1.2. The risk-free rate is 5% and you
estimate the market risk premium to be 6%. If you expect the share to have a return of
11% over the next year, should you buy it? Why or why not?