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 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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