Question

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below.

Stock		Investment			Beta
A		$188,000			1.51
B		282,000			0.52
C		470,000			1.35

Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 18 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.)

Answer 1

	Amount	weight	beta	weight*beta
A	188,000.00	0.2000	1.51	0.3020
B	282,000.00	0.3000	0.52	0.1560
C	470,000.00	0.5000	1.35	0.6750

Beta = 1.133

expected return = 6% + 1.133*12% = 19.60%