6 -7.3 You have just invested in a portfolio of three stocks. The amount of mone

Question

6 -7.3

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 16 percent and that the risk-free rate is 8 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.) Beta of the portfolio Expected rate of return %

Explanation / Answer

Total investment = $224000 + $336000 + $560000 = $1120000

Beta of portfolio = 1.50 * 224 / 1120+ .69 * 336 / 1120 + 1.35 * 560 / 1120

Beta of portfolio = 1.182

Expected Return = Risk Free rate + Beta * (Market Rate - Risk Free Rate)

= 8% + 1.182 * (16% - 8%) = 17.46%

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

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