Question

What is the E(R) on the following portfolio if expected market return is 7.5% and the RF rate is 1.5%?

Asset A: Investment = $2500, Current Market Value = $2000, Beta = .8

Asset B: Investment = $1500, Current Market Value = $3500, Beta = 1.3

Asset C: Investment = $1000, Current Market Value = $4500, Beta = 1.0

Answers: A) 10.65% B) 9.16% C) 7.39% D) None of the above

Answer 1

Current Portfolio Value = A's Market Value + B's Market Value + C's Market Value

= $2,000 + $3,500 + $4,500 = $10,000

Portfolio's Beta = [$\sum_{i=1}^{n}$(Weight_i * Beta_i)]

= [(2,000/10,000) * 0.8] + [(3,500/10,000) * 1.3] + [(4,500/10,000) * 1.0]

= 0.16 + 0.455 + 0.45 = 1.065

According to the CAPM,

E(R) = Risk-free Rate + [Beta * (Expected Market Return - Risk-free Rate)]

= 1.5% + [1.065 * (7.5% - 1.5%)]

= 1.5% + [1.065 * 6%]

= 1.5% + 6.39% = 7.89%

Option "D" is correct.