(Portfolio beta and secruity market line) You own a portfolio consisting of the

Question

(Portfolio beta and secruity market line) You own a portfolio consisting of the following stocks:

The risk- free rate is 4 percent. Also, the expected return on the market portfolio is 11 percent.

a. Calculate the expected return of your portfolio.

(Hint: The expected return of a portfolio equals the weighted average of the individual stocks' expected returns, where the weights are the percentage invested in each stock.)

b. Calculate the portfolio beta.

c. Given the foregoing information, plot the security market line. Plot the stocks from your portfolo on your graph.

d. From your plot in part(c), which stocks appear to be your winners and which ones appear to be losers?

e. Why whould you consider your conclusion in part (d) to be less than certain?

STOCK PERCENTAGE OF PORTFOLIO BETA EXPECTED RETURN 1 10% 1.1 18% 2 20 0.9 14 3 5 1.2 20 4 15 0.65 12 5 50 1.5 26

Explanation / Answer

1.15.8%

2.0.945

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