Question

# STOCK   PERCENTAGE OF PORTFOLIO   BETA   EXPECTED RETURN 1 20% 0.95 16% 2 10% 0.90 13% 3...

STOCK   PERCENTAGE OF PORTFOLIO   BETA   EXPECTED RETURN
1 20% 0.95 16%
2 10% 0.90 13%
3 25% 1.15 20%
4 5% 0.70 12%
5 40% 1.55 25%

(Portfolio beta and security market line​) You own a portfolio consisting of the following​ stocks:. The​ risk-free rate is 4 percent.​Also, the expected return on the market portfolio is 10 percent.

a. Calculate the expected return of your portfolio. ​(​Hint: The expected return of a portfolio equals the weighted average of the individual​ stocks' expected​ returns, where the weights are the percentage invested in each​ stock.)

b. Calculate the portfolio beta.

c. Given the foregoing​ information, plot the security market line. Plot the stocks from your portfolio on your graph.

d. From your plot in part ​(c​), which stocks appear to be your winners and which ones appear to be​ losers?

e. Why should you consider your conclusion in part ​(d​) to be less than​ certain?

c. and d.

d. All the stocks appear to be winners since they lie above the SML.
SML equation: E(R) = rf+beta(Rm-rf) = 4+beta(10-4)=4+beta*6

e. We should consider our conclusion in part (d ) to be less than certain because beta is calculated from the historic data which may or may not be applicable for the future calculation.

Please do rate me and mention doubts, if any, in the comments section.

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