Problem 2 10 points Show all your computations The analysts at JP MORGAN compile

Question

Problem 2 10 points Show all your computations The analysts at JP MORGAN compiled information on the following securities. Stock's BetaStandard nv 18.0% 21.0 10.0 Facebook (FB) Best Buy (BBY) Chipotle Mexican Gril CMG) Pfizer (PF) 3M Co (MMM) $100 million 120 million 40 million 1.5 1.2 1.8 12.5% 18.2 21.84 80 million 60 million 1.5 1.6 9.0 8.0 11.36 14.0 You are a manager of a private equity fund who has decided to construct a portfolio consisting of all the securities listed 1. Compute the return on the portfolio. 2. Compute the beta of the portfolio. 5 points 5 points

Explanation / Answer

1.

Total investment =100+120+40+80+60 = 400

Weightage of FB, w1 =100/400 = 0.25

Weightage of BBY, w2 =120/400 = 0.30

Weightage of CMG, w3 = 40/400 = 0.10

Weightage of PF, w4 = 80/400 = 0.20

Weightage of MMM, w5 = 60/400 = 0.15

Expected return on the portfolio = wi*Ri (where Ri is expected return) = 0.25*0.18 + 0.30*0.21 + 0.10*0.10 + 0.20*0.08 + 0.15*0.14 = 0.155 or 15.5%

Expected return ($) = 400*15.5% = 62

2.

Beta of the portfolio = wi*i = 0.25*1.5+0.30*1.2+0.10*1.8+0.20*1.5+0.15*1.6 = 1.455

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