Suppose News Corporation shares have a beta of 1.77,whereas CBA shares have a be

Question

Suppose News Corporation shares have a beta of 1.77,whereas CBA shares have a beta of 0.88.If the? risk-free interest rate is 3.7 % and the expected return of the market portfolio is 11.5 %?, according to the? CAPM,

a. what is the expected return of News Corp? shares?

b. what is the expected return of CBA? shares?

c.what is the beta of a portfolio that consists of 60 % News Corp shares and 40 % CBA? shares?

d. what is the expected return of a portfolio that consists of 60 % News Corp shares and 40 % CBA? shares?

Explanation / Answer

The CAPM formula is: expected equity return = risk free rate + beta*(expected return on market portfolio – risk free rate).

a. Expected return of News Corp shares = 3.7% + 1.77*(11.5% - 3.7%)

= 3.7%+13.806%

= 17.506 % (this can be rounded off to 17.51%)

b. Expected return of CBA shares = 3.7% + 0.88*(11.5% - 3.7%)

= 3.7%+6.864%

= 10.564% (this can be rounded off to 10.56%)

c. beta of portfolio = 60% of News corp beta + 40% of CBA beta

= 60% of 1.77 + 40% of 0.88

= 1.062+0.352

= 1.414 (this can be rounded off to 1.41)

d. expected return of the portfolio = 60% of News corp return + 40% of CBA return

= 60% of 17.506% + 40% of 10.564%

= 10.504%+4.226%

= 14.729% (this can be rounded off to 14.73%)

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