A)Compute the weights of the assets in your portfolio?  B)If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period? C)Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM). ? D)You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:     Tesla Eagle Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4   Compute the expected return of your portfolio.  E)Compute the expected risk (standard deviation) of the portfolio.

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
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Question 4                                                                                        

You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $7,500 of Share A, $4,800 of Share B, $5,700 of Share C, and $2,500 of Share D.

 

Required:

A)Compute the weights of the assets in your portfolio? 

B)If your portfolio has provided you with returns of 7.7%, 10.5%, - 8.7% and 14.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period?

C)Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, beta of this stock is 1.3. Calculate the risk-free rate of return using Capital market pricing model (CAPM). ?

D)You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:

 

 

Tesla

Eagle

Expected return

13%

20%

Standard Deviation of return

20%

45%

Correlation of coefficient (p)

0.4

 

Compute the expected return of your portfolio. 

E)Compute the expected risk (standard deviation) of the portfolio. 

Expert Solution
Step 1

A)

Weight of Investment in A :
Weight of A = $ 7500 / $ 20500
= 0.36585

Weight of Investment in A is 0.36585 or 36.59 %

 

Weight of Investment in B :
Weight of B = $ 4800 / $ 20500
= 0.2341

Weight of Investment in B is 0.2341 or 23.41 %

Weight of Investment in C :
Weight of C = $ 5700 / $ 20500
= 0.278

Weight of Investment in C is 0.278 or  27.8 %

Weight of Investment in D :
Weight of D = $ 2500 / $ 20500
= 0.122

Weight of Investment in D is 0.122 or 12.2 %

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