Question

Long term gov’t bonds are returning 4%. The equity risk premium is 5%. If XYZ stock has a beta of 0.6, what is its expected return?

Assume 20% of a portfolio in ABC, 60% in DEF, and 20% in GHI. ABC returned 10%, DEF returned 5%, and GHI returned 7%. What was the portfolio's return?

We have $25 thousand invested in ABC stock, $50 thousand in DEF stock, and $15 thousand in GHI stock. What percentage of the portfolio is in DEF?

Answer 1

Question-Long term gov’t bonds are returning 4%. The equity risk premium is 5%. If XYZ stock has a beta of 0.6, what is its expected return?

Answer-

As per CAPM or capital assets pricing model,

Expected return on the stock = Rf+ Beta*Equity risk premium

Rf = Risk free rate=4%

Note-Here Long term gov’t bonds are considered to be risk free. Because govt securities are risk free.

=>Expected return on XYZ stock =4%+ 0.6*5%

=>Expected return on XYZ stock = 7%

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Question-Assume 20% of a portfolio in ABC, 60% in DEF, and 20% in GHI. ABC returned 10%, DEF returned 5%, and GHI returned 7%. What was the portfolio's return?

Answer-

Portfolio return =

Security	Weight	Return	Weight*return
ABC	20%	10%	2.00%
DEF	60%	5%	3.00%
GHI	20%	7%	1.40%
Total Portfolio return	6.40%

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Question-

We have $25 thousand invested in ABC stock, $50 thousand in DEF stock, and $15 thousand in GHI stock. What percentage of the portfolio is in DEF?

Answer-

Total ampunt of portfolio = $25000+$50000+$15000 = $90000

percentage of the portfolio is in DEF = [$50000/ $90000]*100 = 55.56%