2. Mr. Morgan is planning to invest £20m in one of two following portfolios. Both portfolios consist of four securities from various industries. The correlation between the returns of the individual securities is thought to be close to zero. Portfolio A investments Equity beta Expected return (%) Amount invested (£m) 1 1.6 18 4 2 0.2 5 6 3 0.6 7 7 4 1 10 3 Portfolio B investments Equity beta Expected return (%) Amount invested (£m) 1 1.4 11 3 2 0.8 10 5 3 0 4.5 7 4 0.4 6 5 QUESTION: (a) Mr. Morgan decides to use the capital asset pricing model (CAPM) to compare the portfolios. The current market return is estimated to be 10 per cent and the rate on Treasury bills is 4.5 per cent. Using the information provided, recommend which one should be selected.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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2. Mr. Morgan is planning to invest £20m in one of two following portfolios. Both portfolios consist of four securities from various industries. The correlation between the returns of the individual securities is thought to be close to zero.

Portfolio A investments

Equity beta

Expected return (%)

Amount invested (£m)

1

1.6

18

4

2

0.2

5

6

3

0.6

7

7

4

1

10

3

 
Portfolio B investments Equity beta Expected return (%) Amount invested (£m)
1 1.4 11 3
2 0.8 10 5
3 0 4.5 7
4 0.4 6 5

QUESTION:

(a)  Mr. Morgan decides to use the capital asset pricing model (CAPM) to compare the portfolios. The current market return is estimated to be 10 per cent and the rate on Treasury bills is 4.5 per cent. Using the information provided, recommend which one should be selected.

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