Question

In: Finance

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

(Portfolio beta and CAPM)  

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

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

a]

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

b]

Second portfolio is riskier as it has a higher beta

c]

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

jeff jeffy answered 2 years ago
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