Question

5.2 Risk premium Consider a portfolio consisting of the following three stocks: The volatility of the market portfolio is Correlation with the Market Portfolio 0.35 0.52 0.54 Volatility 13% 28% 11% Portfolio weight 0.26 0.29 0.45 EC Cor Green Midget Alive And Well 10% and it has an expected return of 8%. The risk-free rate is 3% 1. Compute the beta and 2. Using your answer from question (1), calculate the expected return of the portfolio 3. What is the beta of the port folio? . Using your answer from question (3), calculate the expected ret urn of the portfolio and verify that I expected return of each stock. it matches your answer to question (2)

Answer 1

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Co relation Covariance of Volatlity with Market Security with Beta Return ReturnBeta (Std.Der)Portfoliomarket Expected Portfolio Portfolio Covariance of security with the market Portfolio Weight Corelation Calculation 0.26 0.29 0.45 13% 0.00455 Std Dev of Market Std Dev Of stock Hec C 0.35 Green Midget Alive And Well 0005940594 5.9 11% 0.35 0.54 10 13 Cov- 0.00433 Beta Covariance of security with the market Variancse of market Market Volat Mariket 10% td Dev Retum Variance- Risk-free-rate Espected Return Free BetaMarket Retum- Risk free) Portfolio Return Weight of Stock A* Expected return of the stockA+Weight of Stock B* Expected return Verify as per Question 4 of the stockB+ Portfolio Expected returm By taking Portfolio Beta as calculated above. Portfolio BetaWeight of Stock A Beta of Stock A +Weight of Stock B* Beta of the stock B+ Portfolio Return I Risk Free-Beta(Market Return . Risk free) 3% * 0.31 * (896-3%) 7.04%