Question

If the expected rate of return on the market portfolio is 14% and the risk free rate is 6% find the beta for a portfolio that has expected rate of return of 10%. What assumptions concerning this portfolio and or market condition do you need to make to calculate the portfolio’s beta? b. what percentage of this portfolio must an individual put into the market portfolio in order to achieve an expected return of 10%?

Answer 1

1. Beta of the portfolio will be calculated using the Capital Asset pricing model.

Expected rate of return=risk free rate+ beta( market rate of return- risk free rate)

10= 6+Beta(14-6)

4= 8 Beta

Beta= (4/8)= .5

Beta of the portfolio is .50

2. there will be various assumptions of Capital Asset pricing model that will be taken into consideration for calculation of expected rate of return as beta will be assumed to be the single factor which is representing the overall risk of the portfolio and beta is uniform in nature according to Capital Asset pricing model and market rate of return is also uniform in nature and investors are rational. There are no transaction costs also.

3. Percentage of this portfolio an individual should be putting in market portfolio to achieve an expected rate of return of 10% will be

(10/14)*100

= 71.42%