Kelly has investments with the following characteristics in her portfolio:   Investment in Beta Amount invested Stock Q 1.5 $80,000 Stock R 2.0 $50,000 Stock S 0.85 $70,000   Given the risk free rate of 2% and the market return of 7%, what is the expected rate of return of Kelly’s investment 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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  1. Kelly has investments with the following characteristics in her portfolio:

 

Investment in

Beta

Amount invested

Stock Q

1.5

$80,000

Stock R

2.0

$50,000

Stock S

0.85

$70,000

 

Given the risk free rate of 2% and the market return of 7%, what is the expected rate of return of Kelly’s investment portfolio?

Expert Solution
Step 1

We will use CAPM (Capital Asset Pricing Model) to calculate expected rate of return of Kelly's investment portfolio:

Formula for calculating Expected rate of return of the portfolio with this model:

Expected return of portfolio= Risk free rate + (Market return- Risk free rate)× Beta of the portfolio

In the given question, we will first calculate Beta of the portfolio which is weighted average of each security beta in the portfolio as shown in step 2.

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