You are putting together a prtfolio made up of four diffrent stockds. However, y

Question

You are putting together a prtfolio made up of four diffrent stockds. However, you are considering two possible weightings.

a. The beta on the first porfolio is ?
The beta on the second portfolio is?

B. Which portfolio is risker?

c. If the risk-free rate of interst were 3.5% and the market risk premium were 7.5% then the rate of return on the first portfolio is expected to be %?
If the risk-free of inerest were 3.5% and the market risk premium were 7.5% percent, then the rate of return on the second porfolio is expected to be %?

Asset Beta First Portfolio Second Portfolio a 2.20 20% 30% b 1.10 20% 30% c .40 30% 20% d -1.80 30% 20%

Explanation / Answer

Answer a and b

The weighted average beta of the both portfolios =

Ans to Q. a = Beta on the first portfolio is 0.24 [ ie less than 1.00],

Ans to Q.b = Beta on the second portfolio is 0.71 [ risky than portfoio a}

Q.B the second portfolio is more risky i.e closer of 1.00 [ The assumed market risk}.

Q.C .

The risky return premium is [7.50 X0.24 ] = 1.80+ 3.5 = 5.30%. [ the expected rate of return as the less risky portfoion will give lesser return ]

The risky return premium is [ 7.50 X0.71] =5.325 +3.50 = 8.825% { the riky portflio is more rewarding]

THE END

asset beta weight 1st portfolio Avg Wtg avg a 2,20 0.20 044 0.30 0.66 b 1.10 0.20 0.22 0.30 0.33 c 0.40 0.30 0.12 0.20 0.08 d - 1.80 0.30 -0.54 0.20 -0.36 Total weight 1.0 0.24 1.00 0.71

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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