You have just invested in a portfolio of three stocks. The amount of money that
ID: 2725916 • 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 13 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 $186,000 1.57 B 279,000 0.61 C 465,000 1.21Explanation / Answer
Answer
Stock
Investment
Weight of Investment
Beta
Weighted Beta
A
B
A*B
A
186000
0.2
1.57
0.314
B
279000
0.3
0.61
0.183
C
465000
0.5
1.21
0.605
930000
1
Beta of the Portfolio
1.102
Expected rate of return for portfolio = Risk free rate + Beta (Market return – Risk free rate)
= 6% + 1.102 (13% - 6%)
= 6 % + 1.102 (7%)
= 6 % + 7.714%
= 13.714%
Answer : Expected rate of return for the portfolio is 13.714%
Stock
Investment
Weight of Investment
Beta
Weighted Beta
A
B
A*B
A
186000
0.2
1.57
0.314
B
279000
0.3
0.61
0.183
C
465000
0.5
1.21
0.605
930000
1
Beta of the Portfolio
1.102
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