8. The beta of four stocks-P, Q, R, and S-are 059,0.78, 1.14, and 1.39, respecti

Question

8. The beta of four stocks-P, Q, R, and S-are 059,0.78, 1.14, and 1.39, respectively and the beta of portfolio 1 is 0.98, the beta of portfolio 2 is 0.86, and the beta of portfolio 3 is 1.09. What are the expected retums of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 4.5% (risk-free rate) and a market premium of 1 1.5% (slope of the line)? What is the expected return of stock P? What is the expected return of stock Q? What is the expected returm of portfolio 1?

Explanation / Answer

Expected return = risk free rate + beta * market risk premium

Stock P

Expected return = 0.045 + 0.59 * 0.115

= 0.11285 or 11.29%

Stock Q

Expected return = 0.045 + 0.78 * 0.115

= 0.1347 or 13.47%

Portfolio 1

Expected return = 0.045 + 0.98 * 0.115

= 0.1577 or 15.77%

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