You did some additional research, and also found the following values for each stock’s beta coefficient:
Beta Coefficient Stock A Stock B
0.7 1.4
Other current information is as follows:
--Current Risk-free Rate: 5%
--Current Market Rate: 12%
1. What type of risk are we now considering?
2. What is the current Market Risk Premium?
3. What is the required return for each stock suggested by CAPM?
4. Will diversification reduce the type of risk identified in #1 above?
5. Is there anything that can help to reduce this type of risk in a portfolio of stocks? If so, what.
6. Suppose that you invest $1,000 in Stock A, $1,500 in Stock B, and $2,500 in Stock C that has a beta of 2.0. Find your portfolio’s beta and required rate of return.