Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28

Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:

a. What is the expected return of MGM stock?

b. What is the expected return of AEP stock?

c. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?

d. What is the expected return of that portfolio with the beta that you found in part c.?

e. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?

Here’s the SOLUTION

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