You have just invested in a portfolio of three stocks. The amount of money that
ID: 2711697 • Letter: Y
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 14 percent and that the risk-free rate is 7 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%.)
Explanation / Answer
Stock
Investment
Beta
Investment x Beta
A
$206,000
1.45
298700
B
$309,000
0.48
148320
C
$515,000
1.19
612850
Total
$1,030,000
1059870
Portfolio beta = sum of investment x beta / total investment
= 1059870 / $1,030,000
= 1.029
Rf =7%
Rm=14%
ERp = Rf +(RM-Rf)xBeta
= 7% +(14%-7%)x1.029
=7% +7.023
=14.20%
Stock
Investment
Beta
Investment x Beta
A
$206,000
1.45
298700
B
$309,000
0.48
148320
C
$515,000
1.19
612850
Total
$1,030,000
1059870
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