You have been asked to analyse the following portfolio of shares. The owner is w
ID: 2373436 • Letter: Y
Question
You have been asked to analyse the following portfolio of shares. The owner is wondering whether the return received is sufficient to justify the risks associated with each share. The following infromation has been collected for your analysis. The average annual market return is 12% and the risk free rate is 8%.
Advise the shareholder on their portfolio specifically answering their question of "whether the return received is sufficient to justify the risks assiciated with each share". Show calculations to support your answer.
The answer shows:
How has the expected return been calculated?
Beta Realised annual rate of return Red Ltd 1.10 10 Blue Ltd 1.20 20 Green Ltd 0.80 8 Black Ltd 0.90 15Explanation / Answer
this may help you..
Example: Expected Return
For a simple portfolio of two mutual funds, one investing in stocks and the other in bonds, if we expect the stock fund to return 10% and the bond fund to return 6% and our allocation is 50% to each asset class, we have the following:
Expected return (portfolio) = (0.1)*(0.5) + (0.06)*(0.5) = 0.08, or 8%
Expected return is by no means a guaranteed rate of return. However, it can be used to forecast the future value of a portfolio, and it also provides a guide from which to measure actual returns.
Let's look at another example. Assume an investment manager has created a portfolio with Stock A and Stock B. Stock A has an expected return of 20% and a weight of 30% in the portfolio. Stock B has an expected return of 15% and a weight of 70%. What is the expected return of the portfolio?
E(R) = (0.30)(0.20) + (0.70)(0.15)
= 6% + 10.5% = 16.5%
The expected return of the portfolio is 16.5%.
Now, let's build on our knowledge of expected returns with the concept of variance.
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