You own a portfolio consisting of the following shares: Share 1 2 3 4 5 Percentage of Portfolio 20% 30% 15% 25% 10% Beta Expected Return 1.00 16% 0.85 14% 1.20 20% 0.60 12% 1.60 24% The risk-free rate is 3%. Also, the expected return on the market portfolio is 10.5%. (a) Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual shares' expected returns, where the weights are the percentage invested in each share.) (b) Calculate the portfolio beta. (c) Given the preceding information, plot the security market line on paper. Plot the shares from your portfolio on your graph. (d) From your plot in part (c), which shares appear to be your winners and which ones appear to be losers? (e) Why should you consider your conclusion in part (d) to be less than certain?
You own a portfolio consisting of the following shares: Share 1 2 3 4 5 Percentage of Portfolio 20% 30% 15% 25% 10% Beta Expected Return 1.00 16% 0.85 14% 1.20 20% 0.60 12% 1.60 24% The risk-free rate is 3%. Also, the expected return on the market portfolio is 10.5%. (a) Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual shares' expected returns, where the weights are the percentage invested in each share.) (b) Calculate the portfolio beta. (c) Given the preceding information, plot the security market line on paper. Plot the shares from your portfolio on your graph. (d) From your plot in part (c), which shares appear to be your winners and which ones appear to be losers? (e) Why should you consider your conclusion in part (d) to be less than certain?
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:You own a portfolio consisting of the following shares:
Share
1
2
3
4
5
Percentage of Portfolio
20%
30%
15%
25%
10%
Beta
Expected Return
1.00
16%
0.85
14%
1.20
20%
0.60
12%
1.60
24%
The risk-free rate is 3%. Also, the expected return on the market portfolio is 10.5%.
(a) Calculate the expected return of your portfolio. (Hint: The expected return of a
portfolio equals the weighted average of the individual shares' expected returns,
where the weights are the percentage invested in each share.)
(b) Calculate the portfolio beta.
(c) Given the preceding information, plot the security market line on paper. Plot the
shares from your portfolio on your graph.
(d) From your plot in part (c), which shares appear to be your winners and which
ones appear to be losers?
(e) Why should you consider your conclusion in part (d) to be less than certain?
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