Question

Portfolio return and beta - Jamie Peters invested $109,000 to set up the following portfolio one year ago.

Asset	Cost	Beta at Purchase	Yearly Income	Value today
A	$30,000	0.73	$1,000	$30,000
B	$32,000	0.95	$1,300	$33,000
C	$36,000	1.51	0	$42,500
D	$11,000	1.33	$350	$11,500

a. calculate the portfolio beta on the basis of the original cost figures.

b. calculate the percentage return on each asset in the portfolio for the year.

c. calculate the percentage return of the portfolio on the basis of original cost, using income and gains during the year.

d. at the time Jamie made his investments, investors were estimating that the market return for the coming year would be 9%. The estimate of the risk-free of return averaged 3% for the coming year. Calculate an expected rate of return for each stock on the basis of its beta and the expectations of market and risk-free returns.

e. on the basis of the actual results explain how each stock in the portfolio performed differently relative to those CAPM-generated expectations of performance. What factors could explain these differences?

Answer 1

Portfolio beta a sum of cast & Beta/ sum of Cost - (0.73% 30,000)+10.95 x 32,000)+(51436,000) + (11,000 41.33) 30,000+ 32,000+ 36,000 & 111000 121,070 109,000 portfolio beta = (1.11 3rcomet (end of the inital values - anitial value Initial value Percentage return (A) 1,000 + (30,000-30000) 30,ooo 3.337. percentage return (B) = 17.29.) percentage return (c) (18.1%. Percentage return (D) = ( 16. 817.)

Percentage return on portfolio (117,000 + 2650) 109,000 - 19.77.) 0 Based on CARM, E(R) =Rft beta X (Rm=Rf) RIA) - 3.4.7 0.73 (9.8.-3).) = 14.567. R(B) = [8.7%.] RC - 9.2.1. R (P) = (8.161.)