Question

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?

Answer 1

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%