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:

Real GDP

The calculation of a nation's economic production taking into account adjustments for variations in prices and inflation, revealing the actual value of goods and services generated.

Percentage Change

A mathematical calculation that represents the degree of change over time as a proportion of the original value, often used to measure growth or decline.

GDP Deflator

A gauge for pricing of all new, native-produced, conclusive goods and services within an economy, applied to revise nominal GDP in order to compute real GDP.

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of goods and services produced by a country in a specific period in real terms.