Question

EJH has a beta of 1.4​, CSH has a beta of 0.6​, and KMS has a beta of 1.1 If you put 25​% of your money in​ EJH, 20​% in​ CSH, and 55​%in​ KMS, what is the beta of your​ portfolio?

Suppose Autodesk stock has a beta of 2.40​, whereas Costco stock has a beta of 0.71 If the​ risk-free interest rate is 6.5% and the expected return of the market portfolio is 13.5%​, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco​ stock, according to the​ CAPM?

Answer 1

1st Part

#	Stock	weights	beta
1	EJH	25%	1.4
2	CSH	20%	0.6
3	KMS	55%	1.1

beta of portfolio of stocks s given by:

β_p = W₁* β_{1 +} W₂* β_{2 +} W₃* β₃

β_p = (0.25*1.4) ₊ (0.2*0.6) ₊ (0.55*1.1) = 1.075

2nd Part

#	Stock	beta	weights
1	Autodesk	2.4	60%
2	Costco	0.71	40%

beta of the above portfolio consisting of two stocks - Autodesk and Costco is given by:

β_p = W₁* β_{1 +} W₂* β₂ = (0.6*2.4) + (0.4*0.71) = 1.724

CAPM Equation for portfolio of stocks

R_p = R_f + β_p*(R_M - R_f)

R_f = 6.5%, R_M = 13.5%, β_p = 1.724

Putting the above values in the CAPM Equation we get,

Return on portfolio of stocks = R_p = 6.5% + 1.724*(13.5% - 6.5%) = 18.568%