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

(Portfolio beta and CAPM)

Portfolio Weightings
Asset	Beta	First Portfolio	Second Portfolio
A	2.40		20%	30%
B	0.90		20%	30%
C	0.60		30%	20%
D	−1.80		30%	20%

a. What is the beta on each portfolio?

b. Which portfolio is riskier?

c. If the risk-free rate of interest were 3 percent and the market risk premium were 7.5 percent, what rate of return would you expect to earn from each of the portfolios?

Solutions

Expert Solution

Beta of each portfolio = (weight of each asset * beta of each asset)

Second portfolio is riskier as it has a higher beta

required return = risk free rate + (beta * market risk premium)

jeff jeffy answered 2 years ago

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