Question

Q1. A portfolio is invested 39% in Stock A, 24% in Stock B, and the remainder in Stock C. The returns for Stock A, B, and C are 11.7%, 39.2%, and 14.3% respectively. What is the portfolio's return?

Q2.

Calculate the portfolio beta based on the following information:

Stock	Invested Amount	beta
A	$2475	0.7
B	$2159	0.3
C	$441	0.8

Q3. The risk-free rate is 2.1%, the market risk premium = ( E(Rm) - Rf) is 6.2%, and the stock’s beta is 1.1. What is the required rate of return on the stock, E(Ri)?
Use the CAPM equation.

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Answer 1

Question – 1, Portfolio Return

Portfolio Return = Sum(Returns x Percentage of Investment)

= (11.70% x 0.39) + (39.20% x .24) + (14.30% x 0.37)

= 4.56% + 9.41% + 5.29%

= 19.26%

Question – 2, Portfolio Beta

Stocks	Amount Invested	Weight to total amount	Beta	Overall Portfolio Beta
A	2,475	0.4877	0.70	0.34
B	2,159	0.4254	0.30	0.13
C	441	0.0869	0.80	0.07
TOTAL	$5,075	1.0000		0.54

“Hence, the Portfolio Beta = 0.54”

Question – 3, Required rate of return on the stock, E(Ri)

As per Capital Asset Pricing Model [CAPM], The Required rate of return on the stock is calculated by using the following equation

The Required rate of return on the stock = Rf + B[Rm-Rf]

Where; Rf = Risk free rate

B = Average Beta of the stock

[Rm – Rf] = Market Risk premium

In this given question, we have Rf = 2.10%

Market Risk Premium (Rm – Rf) = 6.20%

Average Beta of the stock = 1.1

After substituting the given figures into the equation,

The Cost of Common Equity = Rf + B[Rm-Rf]

= 2.10% + [1.1 x 6.20%]

= 2.10% + 6.82%

= 8.92%

“Therefore, the Required rate of return on the stock, E(Ri) = 8.92%”