Question

Suppose News Corporation shares have a beta of 1.55​, whereas CBA shares have a beta of 0.85. If the​ risk-free interest rate is 4.8 % and the expected return of the market portfolio is 13.2 %​, according to the​ CAPM, a. what is the expected return of News Corp​ shares? b. what is the expected return of CBA​ shares? c. what is the beta of a portfolio that consists of 65 % News Corp shares and 35 % CBA​ shares? d. what is the expected return of a portfolio that consists of 65 % News Corp shares and 35 % CBA​ shares?

a. What is the expected return of News Corp​ shares? News​ Corp's expected return is nothing​%. ​(Round to one decimal​ place.) b. What is the expected return of CBA​ shares? ​CBA's expected return is nothing​%. ​(Round to one decimal​ place.) c. What is the beta of a portfolio that consists of 65 % News Corp shares and 35 % CBA​ shares? The portfolio beta is nothing. ​(Round to two decimal​ places.) d. What is the expected return of a portfolio that consists of 65 % News Corp shares and 35 % CBA​ shares? The expected return of the portfolio is nothing​%. ​(Round to one decimal​ place.)

Answer 1

a) risk free interest rate = 4.8%, Beta of News Corporation = 1.55, Expected return on market portfolio = 13.2%

Market risk premium = Expected return on market portfolio - risk free interest rate = 13.2% - 4.8% = 8.4%

According to CAPM

Expected return of New Corporation shares = Risk free interest rate + Beta of News corporation x market risk premium = 4.8% + 1.55 x 8.4% = 4.8% + 13.02% = 17.82% = 17.8% (rounded to one places off decimal)

b) risk free interest rate = 4.8%, Beta of CBA = 0.85 , Expected return on market portfolio = 13.2%

Market risk premium = Expected return on market portfolio - risk free interest rate = 13.2% - 4.8% = 8.4%

According to CAPM

Expected return of CBA shares = Risk free interest rate + Beta of CBA shares x market risk premium = 4.8% + 0.85 x 8.4% = 4.8% + 7.14%= 11.94% = 11.9% (rounded to one places off decimal)

c) Weight of News corporation shares in portfolio = 65% , Weight of CBS shares in portfolio = 35%

Beta of portfolio = Weight of news corporation shares in portfolio x Beta of news corporation shares + Weight of CBS shares in portfolio x Beta of CBS shares = 65% x 1.55 + 35% x 0.85 = 1.0075 + 0.2975 = 1.3050 = 1.31 (rounded to two places off decimal)

d) According to CAPM

Expected return of portfolio = Risk free rate + Beta of portfolio x market risk premium = 4.8% + 1.31 x 8.4% = 4.8% + 11.004% = 15.8040% = 15.8% (rounded to one place of decimal)