CFA CFA Level 1 Question of the Week – Portfolio Management

Question of the Week – Portfolio Management

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    • Avatar of AdaptPrepAdaptPrep
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        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%
      • Avatar of BrentSchneiderBrentSchneider
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          • CFA Level 1
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          Ooops. I forgot to subtract my 5%. 18.95% is answer.

        • Avatar of hairyfairyhairyfairy
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            Completely went off track here. I’m not myself today…

          • Avatar of AdaptPrepAdaptPrep
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              • 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%

            • Avatar of LeChiffreLeChiffre
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                • CFA Level 2
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                (0.2*0.05)+(0.3*0.14)+(0.5)*(0.05+(2.5)*(0.14-0.05)) = 0.1895

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