You have $5,000 invested in Security M, $3,000 invested in Security L, and $2,000 invested in Security P. Security M has a beta of 0.85; Security L has a beta of 1.50; and Security P has a beta
Of 1.90. The relevant risk-free rate is 7%, and the expected return on the market portfolio is
18%. What is the expected return on your portfolio? Round your answer to the nearest tenth
Of a percent.

Question

Quizplus · Accepted Answer

To calculate the expected return on the portfolio, we first need to calculate the portfolio's beta, which is a weighted average of the individual betas. Then, we use the Capital Asset Pricing Model (CAPM) formula to find the expected return.Portfolio Beta = (Weight of M * Beta of M) + (Weight of L * Beta of L) + (Weight of P * Beta of P)= ($5,000/$10,000 * 0.85) + ($3,000/$10,000 * 1.50) + ($2,000/$10,000 * 1.90)= 0.5 * 0.85 + 0.3 * 1.50 + 0.2 * 1.90= 0.425 + 0.45 + 0.38= 1.255Using the CAPM formula: Expected Return = Risk-Free Rate + [Portfolio Beta * (Market Return - Risk-Free Rate)]= 7% + [1.255 * (18% - 7%)]= 7% + 1.255 * 11%= 7% + 13.805%= 20.805%Rounded to the nearest tenth of a percent, the expected return on the portfolio is 20.8%.

You Have $5,000 Invested in Security M, $3,000 Invested in Security