You have just invested in a portfolio of three stocks. The amount of money that

Question

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below.

Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 16 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.)

Stock Investment Beta A $194,000 1.56 B 291,000 0.69 C 485,000 1.34

Explanation / Answer

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below.

Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 16 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.)

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below.

Stock Investment Beta A $194,000 1.56 B 291,000 0.69 C 485,000 1.34

Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 16 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.)

Beta of the portfolio Expected rate of return Stock Investment Weights Beta Weights x Beta A $194,000 20.00% 1.56 0.312 B 291,000 30.00% 0.69 0.207 C 485,000 50.00% 1.34 0.67 $970,000 100.00% 1.189 Using CAPM rate of Return = RF + beta (RM - RF Expected rate of return = 6% +1.189 x (16%- 6%) Expected rate of return 17.89%

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