An investor currently holds the following portfolio: Amount Invested 8,000 share

Question

An investor currently holds the following portfolio:

                                       Amount

                                       Invested

8,000 shares of Stock    A $16,000    Beta = 1.3

15,000 shares of Stock B $48,000    Beta = 1.8

25,000 shares of Stock C $96,000    Beta = 2.2

a.)The beta for the portfolio is

A) 1.99.

B) 1.77.

C) 1.45.

D) 1.27.

b), If the risk-free rate of return is 4% and the expected market return is 13%, then the required return on the portfolio is

A) 14.00%.

B) 17.91%.

C) 21.91%.

D) 23.85%.

Explanation / Answer

a)

We simply add up last column to determine portfolio beta = 1.99

Therefore portfolio beta = 1.99

b)

Risk premium = 13% - 4% = 9%

As per CAPM model,

Required return = Risk free return + (Risk premium * Beta) = 4 + (9* 1.99) = 21.91%

Therefore, required return on portfolio = 21.91%

Beta Amount invested Percentage of portfolio Beta times % of portfolio Stock A 1.3 16000 10% 0.13 Stock B 1.8 48000 30% 0.54 Stock C 2.2 96000 60% 1.32 Total 1.99

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