Problem 1: If I have a company whose beta is .54,the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium is 6.5%, using the CAPM equation, what is the present cost of equity of my company?
Problem 2: If I have 2 companies, A and B, the beta of A is .50, the beta of B is .23, if I invest 1/3 of my money in each of the stocks of these companies, What will the beta of the portfolio be? If I add my other stock with a beta of .54, what would be the expected rate of return on this portfolio be? Is this 3-stock portfolio well diversified,or does it still have risk that can be diversified away?