Question

Suppose News Corporation shares have a beta of 1.68​, whereas CBA shares have a beta of 0.79. If the​ risk-free interest rate is 4.8% and the expected return of the market portfolio is 13.8%​, according to the​ CAPM,

a. What is the expected return of News Corp​ shares?

b. What is the expected return of CBA​ shares?

c. What is the beta of a portfolio that consists of 65% News Corp shares and 35% CBA​ shares?

d. What is the expected return of a portfolio that consists of 65% News Corp shares and 35% CBA​ shares?

a. News​ Corp's expected return is ................. ​%. ​(Round to one decimal​ place.)

b. CBA's expected return is ................. ​​%. (Round to one decimal​ place.)

c. The portfolio beta is ................. ​​(Round to two decimal​ places.)

d. The expected return of the portfolio is ................. ​​%. ​(Round to one decimal​ place.)

Answer 1

A) Expected return of news Corp = Rf + beta × (Rm - Rf)

= 0.048 + 1.68 × ( 0.138 - 0.048)

Expected return of news Corp = 19.92% = 19.9%

B) Expected return on CBA :-

Expected return of CBA = 0.048 + 0.79 × ( 0.138 - 0.048)

Expected return of CBA = 11.9%

C) Portfolio beta = weight of news Corp × beta of news Corp + weight of CBA × beta of CBA

= 0.65 × 1.68 + 0.35 × 0.79

Portfolio beta = 1.3685 = 1.37

D) Portfolio Expected return = weight of news Corp ×Expected return on news Corp  + weight of CBA × Expected return on CBA

= 0.65 × 19.9% + 0.35 × 11.9%

Portfolio Expected return = 17.1% = 17.1%