Question

Jeanne Lewis is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data:

       Portfolio Weights  
Asset   Asset Beta   Portfolio A   Portfolio B
1   1.33   9%   25%
2   0.73   33%   14%
3   1.23   13%   25%
4   1.14   12%   25%
5   0.94   33%   11%
   Total   100%   100%

.

a. Calculate the betas for portfolios A and B.

b. If the risk-free rate is 2.62.6 % and the market return is 7.87.8 %,calculate the required return for each portfolio using the CAPM.

Answer 1

Answer:

A]

Asset	Beta	Weight	Product
1	1.33	9%	0.1197
2	0.73	33%	0.2409
3	1.23	13%	0.1599
4	1.14	12%	0.1368
5	0.94	33%	0.3102
	Portfolio A Beta		0.9675

Asset	Beta	Weight	Product
1	1.33	25%	0.3325
2	0.73	14%	0.1022
3	1.23	25%	0.3075
4	1.14	25%	0.2850
5	0.94	11%	0.1034
	Portfolio B Beta		1.1306

B]

Required return = Rf + beta * (market return – bf)

Portfolio A required return = 7.71%

= 0.02626 +(0.9675 * (0.07878 – 0.02626))

= 0.0770731 = 7.71%

Portfolio B required return = 8.56%

= 0.02626 + (1.1306 * (0.07878 – 0.02626))

= 0.08563 = 8.56%