How would you construct a diversified portfolio with a beta of .25? What is the expected...

How would you construct a diversified portfolio with a beta of .25? What is the expected return to this strategy? Assume Treasury bills yield 3% and the market risk premium is 7%.

Expert Solution

Answer:-

Construct a diversified portfolio with a beta of 0.25:-

As we know beta represents systemmatic risk which is non diversifiable and related to market variance. So to construct such type of portfolio, first we have to find out types of securities available in the market like; Equity, preference shares, bond, debenture, real estate, risk-free government securities etc. Secondly, we have to calculate their beta with the information as much as we have. Third step is analyse the beta and propotionately divided the investment. If there is any security with negative beta, high chances to take in the portfolio because there would be chances this type of securities helpful when share market down. With these analysis, we have to take other factors also like; political and international relation with country etc.

If we go with this strategy, expected return to this strategy as per CAPM:-

= Rf+(Rm-Rf)Beta

= T-bill yield + (market risk premium)beta

= 3%+(7%)0.25

= 4.75%

jeff jeffy answered 2 years ago

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