Question

Problem 17 Intro You've assembled the following portfolio: Stock Beta Portfolio weight The expected market return is 5% and the risk-free rate is 2%. Assume that the CAPM holds. Part 1 Attempt 1/5 for 10 pts. What is the beta of the portfolio? 2+ decimals Submit VB Attempt 1/5 for 10 pts. Part 2 What is the expected return of your portfolio? 3. decimals Submit

Answer 1

Solution:

We know that the portfolio beta is given by:

Beta p = Summation(Individual weights * Individual betas)

=1.3 * .2 + 1.1 * .4 + 0.8*.4

= .26 + .44 + .32

= 1.02

So the portfolio beta comes out to be 1.02 (Solved Part 1)

Using CAPM the expected return on the portfolio is given by:

Kp = rf + beta (rm - rf) { market risk premium}

Where Kp -> Portfolio return

rf -> risk free rate

beta -> portfolio beta

rm -> expected market return

We are given : rf = 2% and rm = 5%, beta = 1.02 (calculated in the previous part)

Inputting the values in the CAPM formula we get:

Kp = 2% + 1.02 (5% - 2%)

= 2% +1.02 * 3%

= 2 + 3.06 = 5.06%

So the expected portfolio return comes out to be 5.06% (Solved part 2)