Question

Security               Beta                       E(R)                        Investment

A                             1.5                          16%                        40%

B                             0                              4%                          60%

Compute for the following:

1. Expected portfolio return
2. Portfolio beta
3. Expected portfolio return if beta is 1
4. Expected portfolio return if beta is 1.4

5. Given the following information, compute for Beta: Rf - 6%; Rm - 15%; E(R) - 21%
6. Given the following information, compute for E(R): Rf - 4.5%; Rm - 15%; Beta - 0.9

Answer 1

Expected portfolio return = expected security return*Weight of security

Security A = 16%*40% = 6.4%

Security B = 4%*60% = 2.4%

Therefore total expected return = 6.4 + 2.4 = 8.8%

Portfolio Beta

= (1.5*40%) + (0*60%)

= 0.60

Expected portfolio return if beta is 1

= 8.8%*1

= 8.8%

Expected portfolio return if beta is 1.4

= 8.8%*1.4

= 12.32%

Expected return = Rf + (Beta*Market return)

21% = 6% + (Beta*15%)

15% = Beta*15%

Beta = 1

Expected return = 4.5% + (0.9*15%)

= 4.5% + 13.5%

= 18%

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