Score: 0 of 1 pt 80f 1 1 (4 complete) ? HW Score: 27.27%, 3 o. Question Help Pro

Question

Score: 0 of 1 pt 80f 1 1 (4 complete) ? HW Score: 27.27%, 3 o. Question Help Problem 6.LO2.22 (similar to) Consider the following historic information on the market, the risk-free rate (T-Bill) and two mutual funds, Templeton and Fideity. Templeton FidelityMarket TBills 1.10% 10.15% Average Return Beta 13.18% 1.50 7.02% 0.70 Assume that you invested in a two asset portfolio comprising the market porfolio and T-bills over the same period as covered in the table. Your portfolio beta was exactly the same as Fidelity's beta. What was the portfolio weight on the market in your portfolio? The portfolio weight on the marketin your portfolio was ? (Round to two decimal places

Explanation / Answer

1. Formula to calculate portfolio’s beta

Portfolio beta = ? (stock’s weight in Portfolio * beta of stock)

Where Portfolio beta should be equal to Fidelity’s beta which is 0.70 and Beta of market portfolio is 1 and beta of risk free rate (T-bills) is zero.

Also assume that market portfolio’s weight in Portfolio = x and risk free rate (T-bills)’s weight in Portfolio = y

Therefore,

Beta of portfolio = x * 1 + y * 0 = 0.7

Or x = 0.7 or 70%

Therefore the portfolio weight of market in your portfolio was 0.70 or 70%

2. Portfolio beta = ? (stock’s weight in Portfolio * beta of stock)

Where,

Beta of mutual fund = 1 (as index with market portfolio)

Beta of risk free rate (T-bills) = 0

Risk free rate (T-bills)’s weight in Portfolio = 80%

And Mutual fund’s weight in Portfolio = 1- 80% = 20%

Therefore,

Beta of portfolio = 20% * 1 + 80% * 0 = 0.20

Therefore beta of portfolio is 0.20.

3. Portfolio beta on the basis of investments in each stock, Total Portfolio investment = $40,000 + $40,000 + $80,000 =$ 160,000

Portfolio beta = ? (stock’s investment amount/ Portfolio value) * beta of stock

= ($40,000/ $160,000) * 0.9 + ($40,000/ $160,000) * 0.7 + ($80,000/ $160,000) * 1.9

= 1.35

Therefore beta of portfolio is 1.35

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.