Question

-9 points UTPBFIN1 III.E.016. Consider a portfolio consisting of the following three stocks. Portfolio Weight Volatility Correlation with the market portfolio HEC Corp 0.45 12 0.7 Green Midget yer 02 25% 0.5 AliveAnd well 0.35 134 0.6 The volatility of market portfolio is 10% and it has an expected return of 3%. The risk-free rate is 39 (a) Compute the beta of each stock (rounded to 4 decimal places) HEC Corp Green Midget AliveAnd Well (b) Compute the expected return of each stock (as percents rounded to three decimal places) HEC Corp Green Midget Alive And Well () Using your answer from part (b), calculate the expected return of the portfolio (as a percent). (Round your answer to two decimal places.) (d) What is the beta of the portfolio? (e) Using your answer from part (d), calculate the expected return of the portfolio (as a percent) and verify that it matches your answer to part (C). (Round your answer to two decimal places.) - - 1 points SUBMIT WORK. FILE UPLOAD Type here to search t o R O J AN

Answer 1

Answer (a)

	Volatility of stock	Divided by: Volatility of Market	Relative volatility	Correlation with the market	Beta
HEC	12%	10%	1.20	0.7	0.8400
Green Mident	25%	10%	2.50	0.5	1.2500
AliveAndWell	13%	10%	1.30	0.6	0.7800

Answer (b)

Expected return = Rf + b (Rm - Rf)
Rf=3%
Rm=8%
Rm-Rf=8%-3%=5%
	Risk free rate(Rf)	Beta (b)	Market risk premium (Rm)	Expected return (3%+b5%)
HEC	3%	0.8400	5%	7.200%
Green Mident	3%	1.2500	5%	9.250%
AliveAndWell	3%	0.7800	5%	6.900%

Answer (c)

	Expected return	Multiply: Weight	Expected return by weight
HEC	7.200%	0.45	3.24%
Green Mident	9.250%	0.20	1.85%
AliveAndWell	6.900%	0.35	2.42%
Expected return of the portfolio			7.51%

Answer (d)

	Beta	Multiply: Weight	Beta by weight
HEC	0.8400	0.45	0.378
Green Mident	1.2500	0.20	0.250
AliveAndWell	0.7800	0.35	0.273
Beta of the portfolio			0.901

Answer (e)

Expected return = Rf + b (Rm - Rf)
Rf=3%
Rm=8%
Rm-Rf=8%-3%=5%
Expected return = Rf + b (Rm - Rf)
Expected return = 3% + 0.901 *5%
Expected return = 3% + 4.51%
Expected return = 7.51%
Hence, Answer as per (c) and (e) both are equal.