Question

Jamie Peters invested ​$126,000 to set up the following portfolio one year​ ago:

Asset	Cost	Beta at purchase	Yearly income		Value today
A	​$40,000	0.79	​$1,400		​$40,000
B	​$37,000	0.97	​$1,600		​$38,000
C	​$35,000	1.55	​$0		​$41,500
D	​$14,000	1.27	​$300		​$14,500

a. Calculate the portfolio beta on the basis of the original cost figures.

b. Calculate the percentage return of each asset in the portfolio for the year.

c. Calculate the percentage return of the portfolio on the basis of original​ cost, using income and gains during the year.

d. At the time Jamie made his​ investments, investors were estimating that the market return for the coming year would be 11%. The estimate of the​ risk-free rate of return averaged 3% for the coming year. Calculate an expected rate of return for each stock on the basis of its beta and the expectations of market and​ risk-free returns.

e. On the basis of the actual​ results, explain how each stock in the portfolio performed differently relative to those​ CAPM-generated expectations of performance. What factors could explain these​ differences?

Answer 1

We are instructed to answer only first four requirements in question. But still I solved for your convenience.