Chapter 9, Problem 1PS

Summary Introduction

To calculate: The value of beta of the portfolio.

Introduction: The beta value is useful while calculating the systematic risk of the portfolio. It measures the arise risk of the market due to movement. In general the beta value should be unity for the assets. Low beta value represents the unpredictable investment.

Answer to Problem 1PS

The beta value is 1.5 for the portfolio.

Explanation of Solution

Given that the expected return rate $E\left(r_p\right)$ = 18%, risk free rate $r_f$ = 8%, expected market rate $E\left(r_m\right)$ = 14%. Now beta value is calculated by given formula,

  $\beta =\frac{E\left(r_p\right)-r_f}{E\left(r_m\right)-r_f}$ , now substitute the values,

  $\beta =\frac{18-6}{14-6}$

  $\beta =\frac{12}{8}$

  = 1.5

Hence the beta value is 1.5 for the portfolio.