Question

A portfolio has the following stocks:

Stock	Amount Invested	Stock's Beta
A	$2,000	1.4
B	$8,000	1.2
C	$15,000	1.6

Suppose that the risk-free rate of return is 4% and the market return is 20%.

(1) What are the weights for Stocks A, B and C, respectively? (

2) What is the portfolio’s beta?

(3) What is the expected return for Stock A?

(4) What is the expected return for the portfolio?

Answer 1

1. Weights for stock A B and C.

Stock	Amount invested	weight
A	$2,000	($2,000/25,000)=>0.08
B	$8,000	($8,000/25,000)=>0.32
C	$15,000	($15,000/25,000)=>0.60
Total	$25,000	1.00

2. Portfolio Beta = sum of (weight * stock beta)

=> (0.08*1.40) + (0.32*1.20) + (0.60*1.60)

=>1.456.

3.expected return for stock A

=> risk free rate + beta*(market return - risk free rate)

=>4%+1.4*(20%-4%)

=>4% +22.4%

=>26.4%.

4.expected return for the portfolio = risk free rate + beta*(market return - risk free rate)

=>4%+1.456*(20%-4%)

=>4% + 23.296%

=>27.296%

=>27.30%.