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% |

security
beta
Standard deviation
Expected return
S&P 500
1.0
20%
10%
Risk free security
0
0
4%
Stock d
( )
30%
13%
Stock e
0.8
15%
( )
Stock f
1.2
25%
( )
5) A complete portfolio of $1000 is composed of the risk free
security and a risky portfolio, P, constructed with 2 risky
securities, X and Y. The optimal weights of X and Y are 80% and 20%
respectively. Given the risk free rate of 4%....

security
beta
Standard deviation
Expected return
S&P 500
1.0
20%
10%
Risk free security
0
0
4%
Stock d
( )
30%
13%
Stock e
0.8
15%
( )
Stock f
1.2
25%
( )
4) You form a complete portfolio by investing $8000 in S&P
500 and $2000 in the risk free security. Given the information
about S&P 500 and the risk free security on the table, figure
out expected return, standard deviation, and a beta for the
complete...

IV. You currently hold a diversified portfolio with a beta of
1.1. The value of your investment is $500,000. The risk-free rate
is 3%, the expected return on the market is 8%.
a) Using the CAPM, calculate the expected return on your
portfolio.
b) Suppose you sell $10,000 worth of Chevron stock (which is
currently part of the portfolio) with a beta of 0.8 and replace it
with $10,000 worth of JP Morgan stock with a beta of 1.6. What...

Suppose that the market portfolio has an expected return of 10%,
and a standard deviation of returns of 20%. The risk-free rate is
5%.
b) Suppose that stock A has a beta of 0.5 and an expected return
of 3%. We would like to evaluate, according to the CAPM, whether
this stock is overpriced or underpriced. First, construct a
tracking portfolio, made using weight K on the market portfolio and
1 − K on the risk-free rate, which has the...

Consider two stocks, A and B. Stock A has an expected return of
10% and a beta of 1.1. Stock B has an expected return of 16% and a
beta of 1.2. The market degree of risk aversion, A, is 4. The
variance of return on the market portfolio is 0.0175. The risk-free
rate is 5%. Required: (4*2.5 = 10pts) A. What is the expected
return of the market? B. Using the CAPM, calculate the expected
return of stock A....

An investor currently holds the following portfolio of 4 stocks,
each having equal weight:
Stock Expected Return (rs) Beta
A 13.2% 1.70
B 12.00% 1.5
C 6.0% 0.5
D 7.8% 0.8
a. What is the portfolio’s expected return?
b. What is the portfolio’s beta risk? Is it more or less risky
than the market?
c. Is the portfolio more or less risky than the market? How do
you know?
The investor is not comfortable with holding a portfolio that
has...

Suppose Intel stock has a beta of 1.44, whereas Boeing stock
has a beta of 0.8. If the risk-free interest rate is 6.4 % and the
expected return of the market portfolio is 10.5 %, according to
the CAPM,
a. What is the expected return of Intel stock?
b. What is the expected return of Boeing stock?
c. What is the beta of a portfolio that consists of 55 % Intel
stock and 45 % Boeing stock?
d. What is...

You want to create a portfolio that generates an expected return
of 13.5% and a beta of 1.1 by investing in two stocks (P and Q) and
a risk-free asset with a sure rate of 4%. The beta of Stock P is
1.3, and its expected return is 16%. The beta of Stock Q is 0.9,
and its expected return is 10.0%. What is the weight on Stock P in
your portfolio? A. 48.29% B. 35.00% C. 51.71% D. 65.00%

You want to create a portfolio that generates an expected return
of 13.5% and a beta of 1.1 by investing in two stocks (P and Q) and
a risk-free asset with a sure rate of 4%. The beta of Stock P is
1.3, and its expected return is 16%. The beta of Stock Q is 0.9,
and its expected return is 10.0%. What is the weight on Stock P in
your portfolio?
A. 48.29%
B. 35.00%
C. 51.71%
D. 65.00%

You want to create a portfolio that generates an expected return
of 13.5% and a beta of 1.1 by investing in two stocks (P and Q) and
a risk-free asset with a sure rate of 4%. The beta of Stock P is
1.3, and its expected return is 16%. The beta of Stock Q is 0.9,
and its expected return is 10.0%. What is the weight on the
risk-free asset? A. 28.32% B. 8.71% C. 65.00% D. 6.67%

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 4 minutes ago

asked 15 minutes ago

asked 27 minutes ago

asked 48 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago