Question

 You are putting together a portfolio made up of four different stocks. ​ However, you are considering two possible​ weightings: CHART BELOW

a.  What is the beta on each​ portfolio?

b.  Which portfolio is​ riskier?

c.  If the​ risk-free rate of interest were 5 percent and the market risk premium were 7.5 percent​, what rate of return would you expect to earn from each of the​ portfolios?

Portfolio Weightings
Asset	Beta		First Portfolio	Second Portfolio
A	2.40		12​%	38​%
B	0.90		12​%	38​%
C	0.45		38​%	12​%
D	−1.60		38​%	12​%

Answer 1

Question a:
Calculation of Beta of the Portfolio
Asset	Beta	First Portfolio	Second Portfolio
Weight	Expecte Value	Weight	Expecte Value
A	B	C	D = B*C	E	F = B*E
A	2.4	12%	0.288	38%	0.912
B	0.9	12%	0.108	38%	0.342
C	0.45	38%	0.171	12%	0.054
D	-1.6	38%	-0.608	12%	-0.192
Beta			-0.041		1.116

Beta of the First Portfolio is -0.041

Beta of Second Portfolio is 1.116

Question b:

First portfolio is more riskier than Second portfolio

First portfolio beta situation is high unlikely situation which will happen when market declines

Quesiton c:

Rf = Risk free rate = 5%

Rm-Rf = Market risk premium = 7.5%

Expected Return on First portfolio = Rf + beta * (Rm-Rf)

= 5% + (-0.041*7.5)

= 5% - 0.3075%

= 4.6925%

Expected Return on Second portfolio = Rf + beta * (Rm-Rf)

= 5% + (1.116*7.5)

= 5% + 8.37%

= 13.37%

Expected Return on First Portfolio is 4.69%

Expected Return on Second Portfolio is 13.37%