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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