Question

The risk-free return is 5.0% and the market return is 12.7%. What is the expected return for the following portfolio? (State your answer in percent with two decimal places.) Stock Beta Investment AAA 3.8 $400,000 BBB 2.8 $1,000,000 CCC 1.7 $2,200,000 DDD 1.0 $1,800,000 19.06% O 14.06% 28.19% 23.19% 18.26%

Answer 1

Beta of portfolio (Weighted beta) = sum of (weight * beta) of all security /Total weight      
      
Weights are investment      

Total weight is total investment that is = 400000+1000000+2200000+1800000      
=5400000      

Beta of portfolio= ((400000*3.8)+(1000000*2.8)+(2200000*1.7)+(1800000*1.0))/5400000      
=1.825925926      
      
Expected return of Portfolio as per CAPM model = Risk free rate +(Beta of Portfolio*(Market Expected Return - Risk free rate))      
=5%+(1.8259*(12.7%-5%))      
=19.06%      
      
      
So Expected return of portfolio is 19.06%      
      

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