Question

Security T-Bill = 1.4% S&P 500 = 8% Beta 1.22 0.84 2.21 0.67 0.36 Based on the CAPM, what are the expected returns on the 5 stocks (A, B, C, D, E)? (12 points) If you invest 30% in the S&P 500, 20% in T-Bill, and 10 % each in the 5 stocks, what is the beta of your portfolio? (4 points)

Answer 1

Expected return = risk free rate + (beta * (market return - risk free rate)).

Here, risk free rate is the T-Bill rate, and market return is the S&P 500 return.

Expected return of A = 1.4% + (1.22 * (8% - 1.4%)) = 9.45%.

Expected return of B = 1.4% + (0.84 * (8% - 1.4%)) = 6.94%.

Expected return of C = 1.4% + (2.21 * (8% - 1.4%)) = 15.99%.

Expected return of D = 1.4% + (0.67 * (8% - 1.4%)) = 5.82%.

Expected return of E = 1.4% + (0.36 * (8% - 1.4%)) = 3.78%.

Beta of portfolio is the weighted beta of all the individual components of the portfolio. The beta of T-bills is zero, and the beta of S&P 500 is 1.

Beta of portfolio = (30% * 1) + (20% * 0) + (10% * 1.22) + (10% * 0.84) + (10% * 2.21) + (10% * 0.67) + (10% * 0.36)

Beta of portfolio = 0.83