Problem 10-28 Portfolio Beta and Required Return (LG10-3) You hold the positions

Question

Problem 10-28 Portfolio Beta and Required Return (LG10-3)

You hold the positions in the table below.  

  

What is the beta of your portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

If you expect the market to earn 15.50 percent and the risk-free rate is 5.50 percent, what is the required return of the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Price Shares Beta Advanced Micro Devices $ 20.00 320 4.50 FedEx Corp 136.00 72 1.57 Microsoft 24.00 114 1.20 Sara Lee Corp 32.00 169 .60

Explanation / Answer

Beta of portfolio=Respective investment weights*Respective betas

=(6400/24336*4.5)+(9792/24336*1.57)+(2736/24336*1.2)+(5408/24336*0.6)

=2.08(Approx)

Required return=Risk free rate+Beta*(Market rate-Risk free rate)

=5.5+2.08*(15.5-5.5)=26.33%(Approx)

Total value Beta Advanced micro devices (20*320)=6400 4.5 FedEx (136*72)=9792 1.57 Microsoft (24*114)=2736 1.2 Sara Lee (32*169)=5408 0.6 Total=24336

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