Question

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?

Answer 1

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.

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