Question

1. You bought 200 shares of Dr Pepper Snapple Group at $70.67 per share, 100 shares of Home Depot at $111.72 per share, and 50 shares of Tesla Motors at $235.11 per share one year ago. Suppose that the financial data from the same period indicate that Dr Pepper Snapple Group, Inc. stock has a beta of -0.11, Home Depot, Inc. stock has a beta of 1.21, and Tesla Motors, Inc. stock has a beta of 1.4. The risk-free interest rate is 2% and the market risk premium is 6.7%.

What is the beta of the portfolio?

A. 0.7668

B. 1.9550

C. 1.2313

D. 0.8307

E. 0.4828

F. 1.0935

2. Use the information provided in Question 1. Compute the expected return of the portfolio using the Capital Asset Pricing Model (CAPM)

A. 5.60%

B. 4.94%

C. 9.33%

D. 4.26%

E. 7.14%

F. 15.13%

3. Use your answer in Question 2. If the portfolio’s actual rate of return during the year was 9%, which of the following is a correct statement?

A. The performance of the portfolio was better than the expected return.

B. The performance of the portfolio was worse than the expected return.

Answer #1

1. | |

Total value | |

Dr pepper snapple group [ 70.67*200 ] | 14134 |

Home Depot [ 111.72*100 ] | 11172 |

Tesla motors [ 235.11*50 ] | 11756 |

Total | 37062 |

Beta of portfolio = (-0.11*14134/37062) + (1.21*11172/37062) + (1.4*11756/37062) |
0.7668 |

2. | |

Expected return = Risk free + Market risk premium * Beta = 2% + 6.7%*0.7668 |
7.14% |

3. | |

Answer : A. The performance of the portfolio was better than the expected return |

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