Show the formulas used. much appreciated: Information Given: Company: a) Pen Cor

Question

Show the formulas used. 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

1) Expected return E(R)= w1R1 + w2Rq + ...+ wnRn

Expected return on this portfolio E(R) = -2%* (-240/500) + 3%* (420/500) + 9%*(320/500)

= 9.24%

2) The portfolio's market risk =

[R1-E(R)]*2*W1 +[R2-E(R)]*2*W2 +[R3-E(R)]*2*W3

= [(-2-9.24)*2*-0.48 + (3-9.24)*2*.84 + (9-9.24)*2*0.64]^2

= 93^2

=9.64

3) CAPM, Rsik free rate = 4% and market return =10%

E(R) = risk free return + beta* market risk premium

= 4+ *0.97(10-4)

= 9.82

undervalued

4) E(R) = risk free return + beta* (market return - risk free return)

a) Pen Corp. = 4% + 1.2*(10-4) = 11.2

b) ENT Inc. = 4% + 0.7*(10-4) = 8.2

c) Motor Tech= 4% + 1.5*(10-4) = 13

best-risk adjusted return = motor tech 13%

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