The beta of four stocks —G,H, I, and J —are 0.41, 0.75, 1.02, and 1.65, respectively and the beta of portfolio 1 is 0.96, the beta of portfolio 2 is 0.79, and the beta of portfolio 3 is 1.09.
What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 4.5% (risk-free rate) and a market premium of 11.0% (slope of the line)?
What is the expected return of stock G?
(Round to two decimal places.)
What is the expected return of stock H?
(Round to two decimal places.)
What is the expected return of stock I?
(Round to two decimal places.)
What is the expected return of stock J?
(Round to two decimal places.)
What is the expected return of portfolio 1?
(Round to two decimal places.)
What is the expected return of portfolio 2?
(Round to two decimal places.)
What is the expected return of portfolio 3?
(Round to two decimal places.)
| Risk free rate of return | 4.5 | % | ||||
| Market risk premium | 11 | % | ||||
| SML equation | ||||||
| Expected rate of return = Risk free rate of return + Beta * Market Risk premium | ||||||
| Stock G | ||||||
| 4.5 + | (0.41 * 11) | |||||
| 20.30 | % | |||||
| So, Expected return of Stock G is 20.30% | ||||||
| Stock H | ||||||
| 4.5 + | (0.75 * 11) | |||||
| 37.13 | % | |||||
| So, Expected return of Stock H is 37.13% | ||||||
| Stock I | ||||||
| 4.5 + | (1.02 * 11) | |||||
| 50.49 | % | |||||
| So, Expected return of Stock H is 50.49% | ||||||
| Stock J | ||||||
| 4.5 + | (1.65* 11) | |||||
| 81.68 | % | |||||
| So, Expected return of Stock J is 81.68% | ||||||
| Portfolio 1 | ||||||
| 4.5 + | (0.96* 11) | |||||
| 47.52 | % | |||||
| So, Expected return of Portfolio 1 is 47.52% | ||||||
| Portfolio 2 | ||||||
| 4.5 + | (0.79* 11) | |||||
| 39.11 | % | |||||
| So, Expected return of Portfolio 2 is 39.11% | ||||||
| Portfolio 3 | ||||||
| 4.5 + | (1.09* 11) | |||||
| 53.96 | % | |||||
| So, Expected return of Portfolio 3 is 53.96% | ||||||
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