Question

Portfolio return and beta  Personal Finance Problem  Jamie Peters invested ​$117,000 to set up the following portfolio one year​ ago:

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

b.  Calculate the percentage return of 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 11%. The estimate of the​ risk-free rate 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, each stock in the portfolio performed differently relative to those​ CAPM-generated expectations of performance. What factors could explain these​ differences?

Assets	Cost	Beta at purchase	Yearly income	Value today
A	38000	0.75	1100	38000
B	33000	0.97	1300	34000
C	36000	1.56	0	42500
D	10000	1.33	450	10500

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v . 1 ENG 07:47 16-03-2020 21 x 201 2 . ZI Z fix Z K ZR ZSZT ZU ZV ZVA ASSETS COST Q 38000 33000 36000 10000 117000 ZL ZM ZN ZO ZP ZQ WEIGHTED WEIGHT BETA BETA pia 0.32479 0.75 0.24 0.28205 0.97 0.27 0.30769 1.56 0.48 0.08547 1.33 0.11 1.00000 PORTFOLIO BETA = 1.11 (ROUNDED TO 2 DECIMALS] ANS: a ANS : b ASSETS COST PO 38000 33000 36000 10000 117000 YEARLY INCOME D1 1100 1300 VALUE RETURN TODAY ON ASSET P1 (P1+D1-PO)/PO 38000 2.89% [ROUNDED TO 2 DECIMALS] 34000 6.97% 42500 18.06% 10500 9.50% 125000 450 2850 20 ANS :C PORTFOLIO RETURN = (125000 + 2850 - 117000)/117000 = 9.27% [ROUNDED TO 2 DECIMALS) 22 22 202 ... UTILITY, SHARPE, beta convexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bond portfolio ...

All em - 9 W ? v . 1 ENG 07:47 16-03-2020 21 2034 X ZI Z fix Z K ZL ZM ZN ZO ZP ZQ ZRZS ZT ZU ZV zve Rf = Rm = 3% 11% 26 ANS: ASSETS BETA EXPECTED RATE OF RETURN Rf + beta(Rm-Rf) 0.75 9.00% [3% +0.75(11%-3%)] 0.97 10.76% [3% +0.97(11%-3%)] 1.56 15.48% [3% +1.56(11%-3%)] 1.33 13.64% [3% + 1.33(11%-3%)] ANS: ASSETS ACTUAL RETURN 2.89% 6.97% 18.06% 9.50% EXPECTED RETURN 9.00% ACTUAL RETURN < EXPECTED RETURN .000 10.76% ACTUAL RETURN <EXPECTED RETURN 15.48% ACTUAL RETURN > EXPECTED RETURN 13.64% ACTUAL RETURN <EXPECTED RETURN 1354 ONLY C HAS ACTUAL RETURN HIGHER THAN CAPM RETURN THE REASONS CAN BE : 1 BETA IS NOT CORRECTLY ESTIMATED THAT IS, BETA AS A SINGLE MEASURE MAY NOT TAKE CARE OF ALL SYSTEMATIC FACTORS WHICH CAUSE EXPECTED RETURN 2 THE UNDERPERFORMANCE OF OTHER STOCKS MAY BE DUE TO PRESENCE OF SOME UNSYSTEMATIC FACTORS 3 FIRM'S CHARACTERISTICS MAY HAVE CHANGED SO BETA MAY NOT BE TRULY SHOWING CORRECT VALUE ... UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bond portfolio ... ►