A Portfolio return and beta Personal Finance Problem Jamie Peters invested $124,
ID: 2785867 • Letter: A
Question
A
Portfolio return and betaPersonal Finance ProblemJamie Peters invested
$124,000
to set up the following portfolio one year ago
a.Calculate the portfolio beta on the basis of the original cost figures. round two decimal places
b.Calculate the percentage return of each asset in the portfolio for the year.
c.Calculate the percentage return of the portfolio on the basis of original cost, using income and gains during the year.
d.At the time Jamie made his investments, investors were estimating that the market return for the coming year would be
12 %
The estimate of the risk-free rate of return averaged
5 %
for the coming year. Calculate an expected rate of return for each stock on the basis of its beta and the expectations of market and risk-free returns.
e.On the basis of the actual results, each stock in the portfolio performed differently relative to those CAPM-generated expectations of performance. What factors could explain these differences?
Asset cost beta at purchases yearly income value todayA
$34000 0.78 $1200 $34000 B $ 35000 0.98 $1600 $36000 C $ 39000 1.45 $0 $ 45500 D $ 16000 1.38 $350 $ 16500Portfolio return and betaPersonal Finance ProblemJamie Peters invested
Explanation / Answer
a) Beta = Sum of Original Cost x Beta / Sum of Original Cost = (0.78 x 34,000 + ... + 1.38 x 16,000) / 124,000 = 1.125
b) % Returns = (Value today + Income) / Original Cost - 1
c) Returns = (132,000 + 3,150) / 124,000 - 1 = 8.99%
d) Expected Return = Rf + beta x (Rm - Rf)
here, Rf = 5%, Rm = 12%
e) The difference could be due to change in beta or risk-free rate or market returns over the last year.
Asset cost Beta Income value today Returns Exp. Return A $34,000 0.78 $1,200 $34,000 3.53% 10.46% B $35,000 0.98 $1,600 $36,000 7.43% 11.86% C $39,000 1.45 $0 $45,500 16.67% 15.15% D $16,000 1.38 $350 $16,500 5.31% 14.66% Portfolio $124,000 1.125 $3,150 $132,000 8.99% 12.87%