Question

# A portfolio has the following stocks: Stock Amount Invested Stock's Beta A $2,000 1.4 B$8,000...

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? #### Homework Answers 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%.

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