Calculate the systematic risk and required return of each stock. Calculate the performance of the portfolio of the three Calculate the systematic risk of the portfolio of the three
- B) Suppose we have a portfolio consisting of three (3) shares with the following items:
|
Share |
Weighting |
Standard deviation (s) |
Correlation with the market portfolio |
|
A |
0,3 |
0,12 |
0,38 |
|
B |
0,3 |
0,24 |
0,62 |
|
C |
0,4 |
0,11 |
0,51 |
The standard deviation of the market portfolio is 11%, the return on the market portfolio is 7%, and the annual risk-free interest rate is 4%.
- Calculate the systematic risk and required return of each stock.
- Calculate the performance of the portfolio of the three
- Calculate the systematic risk of the portfolio of the three
Systematic risk is the beta of the stock. This can be calculated with the formula below:
Once we have determined the beta, we can calculate the return of each stock using CAPM formula as below:
Expected Return of Stock = Risk-free rate + Beta of the stock x (Market Return - Risk free rate)
Where risk free rate =4%
Market return = 7%
To calculate the performance of the portfolio we need to add the product of weight of each stock with its expected return calculated above.
To calculate the systematic risk of the portfolio we need to add the product of weight of each stock with its beta
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just to make sure:
in order to calculate the expected return of stock in our case the Rm is 7% or 11%?
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