Question

Expected return of a portfolio using beta. The beta of four stocks-G, H, I, and J are 0.44, 0.78, 1.11, and 1.67, respectively and the beta of portfolio 1 is 1.00, the beta of portfolio 2 is 0.83, and the beta of portfolio 3 is 1.15. What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 3.0% (risk-free rate) and a market premium of 10.0% (slope of the line)? What is the expected return of stock G? 7.40% (Round to two decimal places.) What is the expected return of stock H? 10 % (Round to two decimal places.)

Answer 1

Using CAPM Model,

Expected Return of Stock G = 0.03 + 0.44(0.10)

Expected Return = 7.40%

Using CAPM Model,

Expected Return of Stock H = 0.03 + 0.78(0.10)

Expected Return = 10.80%