Question

Expected return of a portfolio using beta. The beta of four stocks-G, H, I, and J-are 0.47,0.86, 1.08, and 1.56, respectively and the beta of portfolio 1 is 0.99, the beta of portfolio 2 is 0.86, and the beta of portfolio 3 is 1.12. What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 4.5 % Trisk-froe rate ) and a market premium of 9.0 % ( slope of the line)? What is the expected return of stock G? % (Round to two decimal places.)

Answer 1

Solution : - The beta of four stocks - G, H, I and I are 0.47,0.06,108 and 1.56 - the beta of Portfolio 1 is 0.99 the beta of Portfolio 2 is 0.06 - the beta of Portfolio 3 is 112 RRisk free Rate z 4,5% Remanket Premium= 9.0% Demand of Questions, Calculation of f T Expected Retum of each of the four individual Assets and three Portfolio As per CAPM (Capital Asset Pricing model), . Re = Ret Rp 8 Stock G. Re = 4.5%+ 9.09% 0.47 Re=4.5.% +4,23% =) 8.73% Stock H : Re-4.596 + 9.0%x0.06 Re-4,5% + 7.74 =) 12.24%

Stock I Re=4.5%+9%8108 Re=4.5%+9.72% = 14.22% Stock I Re=4.5% +9 % X 156 Re=4.5 % + 14.04%. = 18.54 y. Portfolio 1 Res 4.5% +0.99X97: Re=4.5% + 8.91% => 13.41%. Portfolio-2 Re: 4.5% +0.06 X 9 % Re=4.5% +7,74 % = 12.24% Portfolio 3 Res 4.5% + 1.62X9% Re=4.57.+10.08 %. =): 14.58%