Finance the Beta of Spock's Portfolio Is Corporate

Open, View, and/or
Download this Document

Total Length: 414 words ( 1 double-spaced pages)

Total Sources: 1

Finance

the beta of Spock's portfolio is (.5)(.7)+(.5)(1.1) = 0.9

The beta of Kirk's portfolio is (.9)(1) + (.1)(0) = 0.9

The risk of these two portfolios is the same. Both have the same beta, which implies that they are equally risky, even though their composition is quite different.

Essentially, all securities should be priced at their fair market value, under the efficient market hypothesis. Investors should be completely ration. However, there are two possibilities to explain underpricing of assets. The first is that the investors are not entirely rational. There is certainly enough evidence to support the idea that investors behave irrationally, and the science on the subject is far from certain. So there is at least the possibility of irrational behavior leading to underpricing. Another possible explanation is that the markets are not strong form efficient. This would mean that, if the markets were weak form efficient, that they are functionally efficient but only based on having some information. There is information that exists about the company but which has not yet been priced into the stock.

Stuck Writing Your "Finance the Beta of Spock's Portfolio Is" Corporate?

View All Our Example Finance the Beta of Spock's Portfolio Is Corporate

Have A Custom Example Essay Written

In this situation, the stock could be underpriced.

C. If a two-stock portfolio is completely diversified, the two securities must have offsetting idiosyncratic risk components. So for example, a portfolio which is 50/50 and one security has a beta of 0.8 and the other has a beta of 1.2. In this scenario, the beta of the total portfolio would be (.5)(1.2) + (.5)(.08) = 1.0. The fully-diversified portfolio has a beta of 1.0. Diversifiable risk is only related to the idiosyncratic risk of the firms involved. Systematic risk is not diversifiable so its presence is accepted in a diversified portfolio.

D. 1. The bond yield to maturity is 9.98%. The cost of debt is the ytm -- (1-tax) = 5 x (1-.4) = 5.988%

2. The cost of preferred is D/P = 10/110 = 9.09%

3. The cost of the equity can be calculated using a number of different techniques, including the capital asset pricing model or the dividend discount growth model. Using CAPM, the cost of equity is (7) + (1.2)(6) = 14.2%

Using the dividend discount.....

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Finance The Beta Of Spock's Portfolio Is" (2013, December 11) Retrieved May 21, 2025, from
https://www.aceyourpaper.com/essays/finance-beta-spock-portfolio-179555

Latest MLA Format (8th edition)

Copy Reference
"Finance The Beta Of Spock's Portfolio Is" 11 December 2013. Web.21 May. 2025. <
https://www.aceyourpaper.com/essays/finance-beta-spock-portfolio-179555>

Latest Chicago Format (16th edition)

Copy Reference
"Finance The Beta Of Spock's Portfolio Is", 11 December 2013, Accessed.21 May. 2025,
https://www.aceyourpaper.com/essays/finance-beta-spock-portfolio-179555
   

Open, View, and/or
Download this Document
order custom essay example