Question

Jo Taylor, a portfolio manager, is putting together a portfolio with two different assets. Stock A has a beta of 16 and Stock B has a beta of 1.50. The risk free return is 3.5% and the market risk premium is 5.5%.

1. What is the market expected rate of return?

2. What is the expected rate of return and the beta of a portfolio consisting of 40% Stock A and 60% Stock B?

3. What is the expected rate of return and the beta of a portfolio consisting of 40% Stock A, 40% Stock B and 20% of the risk free?

4. What is the expected rate of return and the beta of a portfolio consisting of 60% Stock A, 60% Stock B and -20% of the risk free?

Answer 1

a

market rate of return = 5.5% + 3.5% risk free rate = 9%

b

Stock	Return	× weight	Expected return
Stock A	88%	40%	35.200%
	=16*5.5%
Stock B	8%	60%	4.950%
	=1.5*5.5%
Risk free	4%	0%	0.000%
Portfolio return		40.150%

portfolio return is 40.15%

c

Stock	Return	× weight	Expected return
Stock A	88%	40%	35.200%
	=16*5.5%
Stock B	8%	40%	3.300%
	=1.5*5.5%
Risk free	4%	20%	0.700%
Portfolio return		39.200%

Answer is 39.20%

d

Stock	Return	× weight	Expected return
Stock A	88%	60%	52.800%
	=16*5.5%
Stock B	8%	60%	4.950%
	=1.5*5.5%
Risk free	4%	-20%	-0.700%
Portfolio return		57.050%

Answer is 57.05%

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