1. Security A, Security B, and Security C have expected returns of 10%, 14%, and

Question

1. Security A, Security B, and Security C have expected returns of 10%, 14%, and 6%, respectively. Assuming a risk-free rate of 4% and a market premium (equal to [E(Rm - Rf)]) of 4%, what are the betas for the three securities?

Beta of A

Beta of B

Beta of C

2. If a portfolio comprises 25% of Security A, 40% of Security B, and 35% of Security C, then what is the portfolio's expected return and beta?

Portfolio expected return %

3. Portfolio beta Does the portfolio beta equal 0.25( A) + 0.4( B) + 0.35( C)?

Explanation / Answer

1) Expected Return = Rf + Beta (market premium)

Beta of A = 0.10 = 0.04 + Beta 0.04

= 0.06 / 0.04 = 0.67

Beta of B = 0.14 = 0.04 + Beta 0.04

= 0.10 / 0.04 = 2.50

Beta of C = 0.06 = 0.04 + Ba 0.04

Ba = 0.02 / 0.04 = 0.50

2) Expected return of the portfolio = 0.10 * 0.25 + 0.14 * 0.4 + 0.06 * 0.35 = 0.102 or 10.20%

Beta of the Portfolio = 0.67 * 0.25 + 2.50 * 0.4 + 0.50 * 0.35 = 1.3425

3) Yes, Portfolio beta Does the portfolio beta equal 0.25( Beta A) + 0.4( Beta B) + 0.35(Beta C)

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