Question

Suppose the risk-free rate is 5.50% and the market portfolio has an expected return of 14.75%. A portfolio is invested equally in three securities with betas of 0.73, 1.48, and 1.53 respectively. What is the expected return on this portfolio?
options: 16.14%
16.56%
16.99%
17.41%
17.83%

Answer 1

Porfolio's beta = (Weight of security A * Beta of security A) + (Weight of security B * Beta of security B) + (Weight of security C * Beta of security C)

Porfolio's beta = [(1/3) * 0.73] + [(1/3) * 1.48] + [(1/3) * 1.53]

Porfolio's beta = 1.2467

Expected return on this portfolio = Risk-free rate + Porfolio's beta(Market return - Risk-free rate)

Expected return on this portfolio = 0.0550 + 1.2467(0.1475 - 0.0550)

Expected return on this portfolio = 0.1703 or 17.03%