- This topic has 4 replies, 4 voices, and was last updated Mar-187:04 am by
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Up1
An investor creates a portfolio by investing 20% of his money in the risk-free asset, 30% in the market portfolio, and 50% in a US stock that has a beta of 2.5. The risk-free rate is 5% and the market return is 14%.
The expected return on the portfolio is closest to:
- 17%
- 19%
- 21%
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Up4
Ooops. I forgot to subtract my 5%. 18.95% is answer.
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Up4
Completely went off track here. I’m not myself today…
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Up4
- beta(RF) = 0
- beta(M) = 1
- beta(US) = 2.5
beta(portfolio) = 0.2(0) + 0.3(1) + 0.5(2.5) = 1.55
Expected return (CAPM) = 0.05 + 1.55(0.14 – 0.05) = 18.95%
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Up3
(0.2*0.05)+(0.3*0.14)+(0.5)*(0.05+(2.5)*(0.14-0.05)) = 0.1895
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