The Terrapins Investment Fund has a total investment of $500 million in five stocks.
Stock Investment (millions) Beta
1 $150 .6
2 120 1.2
3 80 3.0
4 90 1.8
5 60 1.0
Total $500
1. What is the fund’s overall, or weighted average, beta?
2. Refer to the previous problem. If the risk-free rate is 12% and the market risk premium is 6%, what is the required return on the Terrapins Fund?
3. Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:
A. What is the expected return of MGM stock?
B. What is the expected return of AEP stock?
C. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?
D. What is the expected return of that portfolio with the beta that you found in part c.?
E. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?