How would you characterize the risk of the following portfolio, chosen at random
ID: 2789118 • Letter: H
Question
How would you characterize the risk of the following portfolio, chosen at random:
Amount
Std. Deviation
Beta
Stock A
$100,000
28%
0.9
Stock B
$200,000
30%
1.05
Stock C
$250,000
26%
1.3
Stock D
$150,000
40%
1.2
Stock E
$300,000
26%
.75
If the 5 year U.S. Treasury was yielding 3.8% and the stock market was expected to rise by 9.5% in the coming year, what is the required ___ of this portfolio?
Amount
Std. Deviation
Beta
Stock A
$100,000
28%
0.9
Stock B
$200,000
30%
1.05
Stock C
$250,000
26%
1.3
Stock D
$150,000
40%
1.2
Stock E
$300,000
26%
.75
Explanation / Answer
Calculate the portfolio beta taking the weighted average
Portfolio Beta = Sum of amount x beta / Sum of amount = (100,000 x 0.9 + 200,000 x 1.05 + ... + 300,000 x 0.75) / (100,000 + ... + 300,000) = 1.03
Using CAPM, Required Return = Rf + beta x (Rm - Rf)
= 3.8% + 1.03 x (9.5% - 3.8%)
= 9.67%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.