Show the formulas used. much appreciated: Information Given: Company: a) Pen Cor
ID: 2726005 • Letter: S
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
Total Amount Invested=-240+420+320 500 Proportion Pen Corp=-240/500 -0.48 Proportion ENT Inc=420/500 0.84 Proportion Motor Tech=320/500 0.64 (a) Expected Return=Sum of (Proportion*Return)=-0.48*2+0.84*3+0.64*9 7.32 (b)Portfolio Market Risk=Sum of (Proportion*Beta)=-0.48*1.2+0.84*0.7+0.64*1.5 0.972 © Expected Return as per CAPM=Riskfree Rate+Beta*Market Premium=4+0.972*(10-4) 9.83 So at 7.32% , the portfolio is undervalued. (d) The return of Motor Tech is 9% which is close to the return as per CAPM of 9.83%. Sp Motor Tech has the best risk adjusted return.
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