Security Actual Return Std Dev Beta A 29% 20% 1.4 B 22% 25% 0.6 Risk free 4% 0%
ID: 2622463 • Letter: S
Question
Security Actual Return Std Dev Beta
A 29% 20% 1.4
B 22% 25% 0.6
Risk free 4% 0% 0
In one year, we observe that Stock B exactly met its expectations.
5) What is the portfolio beta if you invest 25% in A, 45% in B, and 30% in the risk free asset?
6) What is the market premium?
7) Did Stock A (over/under/exactly) perform its expected return?
Explanation / Answer
5) What is the portfolio beta if you invest 25% in A, 45% in B, and 30% in the risk free asset?
Ans:- Portfolio of the beta = Weighted beta of the portfolio
= 1.4*0.25 + 0.6*0.45 + 0*0.30
= 0.62
6) What is the market premium?
E(r) of portfolio = Rf + (Rm-Rf)*Be
18.35 = 4 + (Rm-4)*0.62
18.35 = 4 + 0.62Rm
5) What is the portfolio beta if you invest 25% in A, 45% in B, and 30% in the risk free asset?
Ans:- Portfolio of the beta = Weighted beta of the portfolio
= 1.4*0.25 + 0.6*0.45 + 0*0.30
= 0.62
6) What is the market premium?
E(r) of portfolio = Rf + (Rm-Rf)*Be
18.35 = 4 + (Rm-4)*0.62
18.35 = 4 + 0.62Rm