Principles of Managerial Finance

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CHAPTER 5 Risk and Return 257

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larly interested in using beta to compare the risks of the portfolios, so she has

gathered the data shown in the following table.

a. Calculate the betas for portfolios A and B.

b. Compare the risks of these portfolios to the market as well as to each other.

Which portfolio is more risky?

5–22 Capital asset pricing model (CAPM) For each of the cases shown in the follow-

ing table, use the capital asset pricing model to find the required return.

5–23 Beta coefficients and the capital asset pricing model Katherine Wilson is won-

dering how much risk she must undertake in order to generate an acceptable

return on her portfolio. The risk-free return currently is 5%. The return on the

average stock (market return) is 16%. Use the CAPM to calculate the beta coef-

ficient associated with each of the following portfolio returns.

a. 10%

b. 15%

c. 18%

d. 20%

e. Katherine is risk-averse. What is the highest return she can expect if she is

unwilling to take more than an average risk?

5–24 Manipulating CAPM Use the basic equation for the capital asset pricing model

(CAPM) to work each of the following problems.

a. Find the required returnfor an asset with a beta of .90 when the risk-free rate

and market return are 8% and 12%, respectively.

Risk-free Market

Case rate, RF return, km Beta, b

A 5% 8% 1.30

B 8 13 .90

C9 12 .20

D 10 15 1.00

E 6 10 .60

Portfolio weights

Asset Asset beta Portfolio A Portfolio B

1 1.30 10% 30%

2 .70 30 10

3 1.25 10 20

4 1.10 10 20

5.90 (^4)  (^0)   (^2)  (^0) 
Totals 1

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0

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