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?

Homework Answers

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%
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