( Portfolia Beta and CAPM ) You are putting together a portfolio made up of four
ID: 2738721 • Letter: #
Question
(Portfolia Beta and CAPM) You are putting together a portfolio made up of four different stocks. However, you are considering two possible weightings:
a.What is the beta on each portfolio? b.Which portfolio is riskier? c.If the risk-free rate of interest were 3.5 percent and the market risk premium were 5.5 percent, what rate of return would you expect to earn from each of the portfolios?
a. The beta on the first portfolio is ____(Round to three decimal places.)
The beta on the second portfolio is _____ (Round to three decimal places.)
b.Which portfolio is riskier?(Select the best choice below.)
A. The second portfolio because the beta is smaller.
B. The first portfolio because the beta is larger.
C. The second portfolio because the beta is larger.
D. The first portfolio because the beta is smaller.
c. If the risk-free rate of interest were 3.5% and the market risk premium were 5.5%, then the rate of return on the first portfolio is expected to be _________%.(Round to two decimalplaces.)
If the risk-free rate of interest were 3.5% and the market risk premium were 5.5%, then the rate of return on the second portfolio is expected to be _______%. (Round to two decimalplaces.)
Portfolio Weightings Asset Beta First Portfolio Second Portfolio A 2 12% 38% B 0.95 12% 38% C 0.45 38% 12% D -1.7 38% 12%Explanation / Answer
Asset
Beta
First Portfolio
Second Portfolio
Weightings
Weighted Beta
Weightings
Weighted Beta
A
2
12%
0.24
38%
0.76
B
0.95
12%
0.11
38%
0.36
C
0.45
38%
0.17
12%
0.05
D
-1.7
38%
(0.65)
12%
(0.20)
(0.12)
0.97
a.
Beta of first portfolio = -0.12
Beta of second portfolio = 0.97
b.
C. The second portfolio because the beta is larger.
c.
Expected return = Risk free rate of interest + (Beta*Market risk premium)
Expected return of first portfolio = 3.5% + (-0.12*5.5%) = 2.83%
d.
Expected return of second portfolio = 3.5% + (0.97*5.5%) = 8.84%
Asset
Beta
First Portfolio
Second Portfolio
Weightings
Weighted Beta
Weightings
Weighted Beta
A
2
12%
0.24
38%
0.76
B
0.95
12%
0.11
38%
0.36
C
0.45
38%
0.17
12%
0.05
D
-1.7
38%
(0.65)
12%
(0.20)
(0.12)
0.97
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.