Question

. (Portfolio beta and security market line) You own a portfolio consisting of the following stocks The risk-free rate is 4 percent. Also, the expected return on the market portfolio is 9 percent. a. Calculate the expected return of your portfolio (Hint: The expected return of a portfolio equals the weighted average of the individual stocks' expected returns where the weights are the percentage invested in each stock.) b. Calculate the portfolio beta. c. Given the foregoing information, plot the security market line. Plot the stocks from your portfolio on your graph d. From your plot in part (c), which stocks appear to be your winners and which ones appear to be losers? e. Why should you consider your conclusion in part (d) to be less than certain? a. What is the expected return of your portfolio? % (Round to two decimal places)

Answer 1

a. Expected Return = 0.20 * 16 + 0.3*14 + 0.15*22 + 0.25*10 + 0.10*24 = 15.6 %

b. Portfolio beta =0.2 * 1.05 + 0.3*0.75 + 0.15*1.3 + 0.25*0.60+0.1*1.55 = 0.935

c. & d.

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