8-20. (Computing the portfolio beta and plotting the security market line) You own a port- folio consisting of the following stocks: Stock Percentage of Portfolio Beta Expected Return 20% 1.00 16% 30% 0.85 14% 15% 1.20 20% 4 25% 0.60 12% 5 10% 1.60 24% The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 10.5 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 preceding information, plot the security market line on paper. Plot the stocks from your portfolio on your graph.
8-20. (Computing the portfolio beta and plotting the security market line) You own a port- folio consisting of the following stocks: Stock Percentage of Portfolio Beta Expected Return 20% 1.00 16% 30% 0.85 14% 15% 1.20 20% 4 25% 0.60 12% 5 10% 1.60 24% The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 10.5 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 preceding information, plot the security market line on paper. Plot the stocks from your portfolio on your graph.
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:8-20. (Computing the portfolio beta and plotting the security market line) You own a port-
folio consisting of the following stocks:
Stock
Percentage of Portfolio
Beta
Expected Return
1
20%
1.00
16%
30%
0.85
14%
3
15%
1.20
20%
4
25%
0.60
12%
5
10%
1.60
24%
The risk-free rate is 3 percent. Also, the expected return on the market portfolio is
10.5 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 preceding information, plot the security market line on paper. 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 your losers?
e. Why should you consider your conclusion in part d to be less than certain?
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