Question

Tom buys and sell in the securities market. Now he has a portfolio including: $10500 of share A,$7200 of share B, $14500 of Share C and $3250 of Share D. Required:

1. Calculate the weights of the assets in his portfolio?
2. If his portfolio has provided him with return of 7.5%, 11.2%, -5.7% and 12.4% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period?
3. Assume the expected return of the stock A in his portfolio is 14.3%. the risk premium on the stocks of the same industry are 4.6%, betas of these stocks is 1.2 and the inflation rate was 3.6%. calculate the risk-free rate of return using Capital market pricing model (CAPM)?
4. He has another portfolio that comprises of two shares only:”1300 shares of company K and 350 shares of company Z.

Below is the data of your portfolio:

	K	Z
Expected return	13%	16%
Standard Deviation of return	21%	38%
Correlation of coefficient (p)	0.7

Calculate the expected return of his portfolio.

5)         Calculate the expected risk (standard deviation of the portfolio).

6)         He bought those two shares 2 years ago with total investment of $15,000. Company k paid a dividend of $3.4/ share per year and Company Z paid a dividend of $6.4 share per year. Calculate his total capital gain of this portfolio if he today can sell shares of company K for $11/share and shares of company Z for 17/share?

Answer 1

You have asked multiple questions in the same post. I will address all sub parts of the first question. Please post sub parts of the other portfolio separately.

Part 1: Calculate the weights of the assets in his portfolio?

Total portfolio value = 10,500 + 7,200 + 14,500 + 3,250 = $ 35,450

Weight of A = 10,500 / 35,450 = 29.62%

Weight of B = 7,200 / 35,450 = 20.31%

Weight of C = 14,500 / 35,450 = 40.90%

Weight of D = 3,250 / 35,450 = 9.17%

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Part 2: If his portfolio has provided him with return of 7.5%, 11.2%, -5.7% and 12.4% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period?

Geometric average = [(1 + r1)(1 + r2)(1 + r3)(1 + r4)]^1/4 - 1 = [(1 + 7.5%)(1 + 11.2%)(1 - 5.7%)(1 + 12.4%)]^1/4 - 1 = 6.10%

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Part 3: Assume the expected return of the stock A in his portfolio is 14.3%. the risk premium on the stocks of the same industry are 4.6%, betas of these stocks is 1.2 and the inflation rate was 3.6%. calculate the risk-free rate of return using Capital market pricing model (CAPM)?

Risk free rate = Expected return - Beta x Risk premium = 14.3% - 1.2 x 4.6% = 8.78%

Please post the balance questions pertaining to the other portfolio separately.