4, A portfolio contains four assets. Asset l has a beta of .8 and comprises 30%

Question

4, A portfolio contains four assets. Asset l has a beta of .8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%. a) what are the expected returns of the assets? b) what are the beta and expected return of the portfolio? c) Draw a security market line given the above information and plot the assets and the portfolio on the security market line. d) which asset (s) will you select in your portfolio and why?

Explanation / Answer

expected returns of asset 1=3%+0.8*6%=7.8%
expected returns of asset 2=3%+1.1*6%=9.6%
expected returns of asset 3=3%+1.5*6%=12%
expected returns of asset 4=3%+1.6*6%=12.6%

Beta of portfolio=30%*0.8+30%*1.1+20%*1.5+20%*1.6=1.19
Expected returns of portfolio=3%+1.19*6%=10.14%

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