PART 3 1. You currently own a portfolio consisting of the following shares: Share Market Value Beta Expected Return A $20,000 1.20 15% В $30,000 1.10 13% C $40,000 0.90 10% You prefer to own a portfolio with lower risk. Therefore, you plan to sell half of the market value in Share A and replace it with a risk-free asset which yields an annual return of 5%. Calculate the expected return and the beta of your new portfolio.
PART 3 1. You currently own a portfolio consisting of the following shares: Share Market Value Beta Expected Return A $20,000 1.20 15% В $30,000 1.10 13% C $40,000 0.90 10% You prefer to own a portfolio with lower risk. Therefore, you plan to sell half of the market value in Share A and replace it with a risk-free asset which yields an annual return of 5%. Calculate the expected return and the beta of your new 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
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:PART 3
1. You currently own a portfolio consisting of the following shares:
Share
Market Value
Beta
Expected Return
A
$20,000
1.20
15%
$30,000
1.10
13%
$40,000
0.90
10%
You prefer to own a portfolio with lower risk. Therefore, you plan to sell half of
the market value in Share A and replace it with a risk-free asset which yields an
annual return of 5%. Calculate the expected return and the beta of your new
portfolio.
B.
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