Jamie Peters invested $100,000 to set up the following portfolio 1 year ago. D.

Question

Jamie Peters invested $100,000 to set up the following portfolio 1 year ago.

D. At the time Jamie made his investments, investors were estimating that the market
return for the coming year would be 10%. The estimate of the risk-free rate of return
averaged 4% for the coming year. Calculate an expected rate of return for each stock
on the basis of its beta and the expectations of market and risk-free returns.

e. On the basis of the actual results, explain how each stock in the portfolio performed
relative to those CAPM-generated expectations of performance. What
factors could explain these differences?

Asset Cost Beta at purchase Yearly income Value today A $20,000 0.80 $1,600 $20,000 B 35,000 0.95 1,400 36,000 C 30,000 1.50 --- 34,500 D 15,000 1.25 375 16,500

Explanation / Answer

Question D. Weitage Portfolio Assets Cost Beta of Portfolio Beta A 20000 0.8 0.200 0.16 B 35000 0.95 0.350 0.3325 C 30000 1.5 0.300 0.45 D 15000 1.25 0.150 0.1875 Total 100000 1 1.1300 Weightage of Portfolio = individual cost / total cost Portfolio beta = Sum total of beta x waitage Expected Return = 4% + (10-4)% x 1.13 = 10.78% Question e Actual Actual Assets Cost Income Return A 20000 1600 8.00% B 35000 1400 4.00% C 30000 0 0.00% D 15000 375 2.50% Total 100000 3375 3.38% Portfolio managed to earn 3.38% return instead of 10.78%. Where as Asset A has given highest return of 8% and Asset C earns no income. Beta and waitage could explain the difference.

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