Bankers Corp

question 121

Essay

Bankers Corp.has a very conservative beta of .7,while Biotech Corp.has a beta of 2.1.Given that the T-bill rate is 5%,and the market is expected to return 15%,what is the expected return of Bankers Corp.,Biotech Corp.,and a portfolio composed of 60% of Bankers Corp.and 40% Biotech Corp.?
a.Solve this problem first by weighting the betas to calculate a portfolio beta,and then using CAPM to calculate the portfolio expected return.
b.Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return.
c.Why is Biotech Corp.'s expected return NOT three times that of Bankers Corp.?

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Definitions:

Traceable

Costs or items that can be directly linked or attributed to a specific product, job, or department, facilitating accurate costing and financial analysis.

Avoidable Cost

A cost that can be eliminated by choosing one alternative over another in a decision. This term is synonymous with differential cost and relevant cost.

Activity-Based Costing

An accounting method that assigns costs to products based on the activities involved in producing those products.

Decision

The process of making choices among alternative courses of action.