Question

27 You ore adinahtial Investr Nha achiely buys ond sells in the sulkes Market Nou you hove a paalia all blue chips, Including 4 q Shace A $7800 share lyao of share C'and32d0 f shareD tequired a Com pde the the assels in youe pattelte. tveight and 134 aver the past 4 years tecpechvely (alela le the ateie average rehta the paelta or thie period? Asseme the eipeckd tehn ot shack A your poctielia ia Is21 The ist pemior on the shcts a the same indusky ate 4.8 belas of this ahock is le3 and the in la han tate was guzt.(altelotethe nist Model CCAPM) rak of tebuen ustng capihal mattet pricoeg dYou have andher Golden sand shares ond 00 silver beach thates Beloe i the dah partdolie that ramprises f hea shares only 1200 GiS SB i7 401 apeckd rehua Standard Dexiahian at tehern 121 Corcelabicn a tafficznt (P) 06 the expeckd rehut Cempak e yaur poctalia the expeded tict latandard deviahon ot pat/elio ompk thace hea shates tee years gg0 cailh otalinvestnaeatatt lsma bught ividesd of 7-share per year Calelae youe Cah sell Goldennd Geldes tand paid to tal capthal gain et this pactolia it you iday for t12 per thare and silver lack or t 18/share

Answer 1

a) Weight of asset in portfolio is as follows:

Total sum of assets in portfolio is 11600 + 7800 + 14900 + 3200 = $ 37500 (Total weight of portfolio)

Now to calculate weight of each asset we need to divide each assets weight to total portfolio weight.

A = 11600 / 37500 = 0.31

B = 7800 / 37500 = 0.21

C = 14900 / 37500 = 0.40

D = 3200 / 37500 = 0.08

b) Calculation of Geometric average return is as follows:

Suppose we invested 1 $ in each portfolio, we would get

1st portfolio return = 1.076

2nd portfolio return = 1.122

3rd Portfolio return = 0.953

4th portfolio return = 1.134

Geometric average return is

{(1.076 x 1.122 x 0.953 x 1.134)^1/4 } - 1 = 6.875%

c) Capital Asset Pricing Model (CAPM) is calculated by the following formula:

Return = Risk free rate of return + Beta ( Return on market - Risk free rate of return )

Return on market - Risk free rate of return is also known as Risk Premium

By applying the above formula we can calculate the assets risk free rate of return as follows:

15.2 = RF + 1.3 (4.80)

RF = 8.96%

d) Expected return of portfolio is the sum of the weighted average return of the individual securities in the portfolio

So, the expected return of portfolio is calculated as follows:

1200/1600 x 0.12 + 400/1600 x 0.17 = 13.25%

e) Variance of portfolio is given by the following formula:

= (Std Deviation of Asset 1)² x (Weight of Asset 1)² + (Std Deviation of Asset 2)² x (Weight of Asset 2)² + 2 x Std Deviation of Asset 1 x Std Deviation of Asset 2 x Weight of Asset 1 x Weight of Asset 2 x Correlation of A and B

= (0.2)² x (0.75)² + (0.4)² x (0.25)² + 2 x 0.20 x 0.40 x 0.75 x 0.25 x 0.60

=0.0505

Now we shall take the under root of 0.0505 to get standard deviation, which will be equal to 0.2247 which is 22.47%