Question

Sample Test Problem 7.03 You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below Stock Investment Beta $188,000 1.51 А 282,000 0.52 В 470,000 1.35 с Calculate the beta of the portfolio and use the Capital Asset Pricing Model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 18 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.) Beta of the portfolio Expected rate of return Open Show Work Click if you would like to Show Work for this question:

Answer 1

Beta of the portfolio = [($188,000/$940,000) × 1.51] + [($282,000/$940,000) × 0.52] + [($470,000/$940,000) × 1.35] = 1.133

Expected rate of return = Risk-free rate + Beta(Expected rate of return on the market - Risk-free rate) = 0.06 + 1.133(0.18 - 0.06) = 0.1960 or 19.60%