Security A, Security B, and Security C have expected returns of 15%, 21%, and 12
ID: 2769397 • Letter: S
Question
Security A, Security B, and Security C have expected returns of 15%, 21%, and 12%, respectively. Assuming a risk-free rate of 3% and a market premium (equal to [E(Rm - Rf)]) of 6%, what are the betas for the three securities?
If a portfolio comprises 25% of Security A, 45% of Security B, and 30% of Security C, then what is the portfolio's expected return and beta?
Does the portfolio beta equal 0.25(A) + 0.45(B) + 0.3(C)?
Yes or No
Security A, Security B, and Security C have expected returns of 15%, 21%, and 12%, respectively. Assuming a risk-free rate of 3% and a market premium (equal to [E(Rm - Rf)]) of 6%, what are the betas for the three securities?
Beta of A? ______ Beta of B? ______ Beta of C?_______If a portfolio comprises 25% of Security A, 45% of Security B, and 30% of Security C, then what is the portfolio's expected return and beta?
Portfolio expected return? _____% Portfolio beta? ______Does the portfolio beta equal 0.25(A) + 0.45(B) + 0.3(C)?
Yes or No
Explanation / Answer
Re = Risk Free rate of return + Market Risk Premium *Beta For A 15% = 3% + 6% * Beta Beta = 12%/6% = 2 For B 21% = 3% + 6% * Beta Beta = 18%/6% = 3 For C 12% = 3% + 6% * Beta Beta = 9%/6% = 1.50 Portfolio Expected Return Wa * Ra + Wb * Rb + Wc * Rc where W represents weight and R presents return Portfolio Return = 0.25 * 15% + 0.45 * 21% + 0.30 * 12% = 3.75% + 9.45% + 3.6% = 16.80% For Portfolio, 16.8% = 3% + 6% * Beta Beta = 13.8% / 6% = 2.3 Portfolio Beta = 0.25(A) + 0.45(B) + 0.3 ( C) = 0.25 * 2 + 0.45 * 3 + 0.30 * 1.5 = 0.50 + 1.35 + 0.45 = 2.30 Hence, Portfolio Beta = 0.25(A) + 0.45(B) + 0.3 ( C)
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