Question

You hold the positions in the table below.

COMPANY PRICE # SHARES BETA

Goodmonth $15.00 400 + 2.6

Icestone $10.00 300 – 4.0

Bridgerock $25.00 440 + 2.4

A. What is the beta of your portfolio?

B. If you expect the market to earn 12 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?

Answer 1

Beta of a portfolio is wieghted average of the beta of individual constituents of portfolio.

Value of Share = Number of shares * Market price

Goodmonth Value = 400 * 15 = 6000

Icestone Value = 300 * 10 = 3000

Bridgerock Value = 440 * 25 = 11000

Total portfolio value = 20000

Weight of Goodmonth = 6000/20000 = 30%

Weight of Icestone = 3000/20000 = 15%

Weight of Bridgerock = 11000/20000 = 55%

Beta of portfolio = (30% * 2.6) + (15% * -4) + (55% * 2.4) = 0.78 - 0.6 + 1.32 = 1.50

Part B. We need to apply CAPM Equation, according to which,

Expected return on portfolio = Risk free Rate + Beta * (Expected Market Return - Risk free Rate)

Expected return on portfolio = 3% + 1.5 * (12% - 3%) = 3% + (1.5 * 9%) = 16.5%