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1. (Capital asset pricing model) The expected return for the general market is 12.8 percent, and the risk premium in the market is 9.3 percent. Tasaco, LBM, and Exxos have betas of 0.864, 0.693, and 0.575, respectively. What are the corresponding required rates of return for the three securities?

2. (Portfolio beta and security market line) You own a portfolio consisting of the stocks below:

The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 11 percent.

a. Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual stocks’ expected returns, where the weights are the percentage invested in each stock.)

b. Calculate the portfolio beta.

c. Given the foregoing information, plot the security market line on paper. Plot the stocks from your portfolio on your graph.

d. From your plot in part (c), which stocks appear to be your winners and which ones appear to be your losers?

e. Why should you consider your conclusion in part (d) to be less than certain?


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