Question

In: Finance

Beta of Assets A, B, C, and D are 1.2, 1.8, 2.4, and 0.8 respectively. You...

Beta of Assets A, B, C, and D are 1.2, 1.8, 2.4, and 0.8 respectively. You form a portfolio with equal weights on A, B, C, and D. The risk-free rate is 2%, and the expected return of the market portfolio is 10%. Find out the expected return of your portfolio according to the CAPM.

Group of answer choices

12%

12.4%

18.2%

17.5%

14.4.%

Solutions

Expert Solution

Ans 14.4.%

Stock INVESTMENT (i) Beta (ii) Investment* Beta (i)* (ii)
A 25%                      1.20                                                    0.30
B 25%                      1.80                                                    0.45
C 25%                      2.40                                                    0.60
D 25%                      0.80                                                    0.20
Total 100%                                                    1.55
Required Return = Risk free Return + (Market Return - Risk free return)* Beta
Required Return = 2% + (10% - 2%)*1.55
Required Return = 14.4%

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