Question

# A portfolio has the following composition: Security Weight Expected Beta A 10% 0.8 B 20% 1.1...

A portfolio has the following composition:

 Security Weight Expected Beta A 10% 0.8 B 20% 1.1 C 30% 1.3 D 40% 0.7

What is the expected beta of the portfolio?

Stock A had a market value of \$20, Stock B had a market value of \$30. During the year, Stock A generated cash flow of \$3 and Stock B generated cash flow of \$4. The current market values are, Stock A is \$22 and Stock B is \$31.

What is the rate of return on stock A?

A portfolio has the following composition:

 Security Weight Expected Beta A 10% 0.8 B 20% 1.1 C 30% 1.3 D 40% 0.7

If the risk-free rate is currently 3%, and the expected market risk premium is 4%, what should be the expected return of the portfolio according to CAPM?

 1] The beta of a portfolio is the weighted average beta of the component securities. It is calculated below: Security Weight Beta Beta*Weight A 10% 0.8 0.08 B 20% 1.1 0.22 C 30% 1.3 0.39 D 40% 0.7 0.28 0.97 Beta of the portfolio = 0.97 2] Rate or return on Stock A = (3+22-20)/20 = 25.00% Rate or return on Stock B = (4+31-30)/30 = 16.67% 3] The beta of a portfolio is the weighted average beta of the component securities. It is calculated below: Security Weight Beta Beta*Weight A 10% 0.8 0.08 B 20% 1.1 0.22 C 30% 1.3 0.39 D 40% 0.7 0.28 0.97 Expected return of portfolio per CAPM = 3%+0.97*4% = 6.88%

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