Show work on how to answer problems much appreciated: Information Given: Company
ID: 2725954 • Letter: S
Question
Show work on how to answer problems much appreciated:
Information Given:
Company:
a) Pen Corp. b) ENT Inc. c) Motor Tech
Amount Invested :
a) -$240 b) $420 c)$320
Return Last Year:
a) -2% b) 3% c) 9%
Beta:
a) 1.2 b)0.7 c) 1.5
1) What is expected return on this portfolio?
2) What is the portfolio's market risk?
3) Assuming CAPM holds, if the risk-free rate is 4% and the market return is 10%, is the portfolio over v alued or undervalued? Briefly explain
4) Looking at each stock individually, which one would you say had the best-risk adjusted return last year assuming 4% risk-free rate and 10% market return? Show calculations to support your answer
Explanation / Answer
Company
Amount invested
Weight
Return
Weighted return
Beta
Weighted beta
Pen Corp.
-$ 240
-0.48
-2%
-0.96%
1.2
-0.576
ENT Inc,
$ 420
0.84
3%
2.52%
0.7
0.588
Motor tech
$ 320
0.64
9%
5.76%
1.5
0.96
$ 500
7.32%
0.972
1.
Expected return of portfolio = 7.32%
2.
Portfolio market risk = 0.972
3.
As per CAPM, Expected return = Risk free rate + (Beta*Market risk premium)
Expected return as per CAPM = 0.04 + 0.972*(0.10-0.04) = 0.04 + 0.0583 = 0.09832 = 9.83%
Actual return is lower than return as per CAPM, hence portfolio is overvalued.
4.
Company
Amount invested
Return
Market return
Market risk premium
Beta
Risk free rate
Return
Pen Corp.
-$ 240
-2%
10%
12%
1.2
4%
18.40%
ENT Inc,
$ 420
3%
10%
7%
0.7
4%
8.90%
Motor tech
$ 320
9%
10%
1%
1.5
4%
5.50%
$ 500
Company
Amount invested
Weight
Return
Weighted return
Beta
Weighted beta
Pen Corp.
-$ 240
-0.48
-2%
-0.96%
1.2
-0.576
ENT Inc,
$ 420
0.84
3%
2.52%
0.7
0.588
Motor tech
$ 320
0.64
9%
5.76%
1.5
0.96
$ 500
7.32%
0.972
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