J.R.has a three stock portfolio.Details of the portfolio are provided in the table.If the T-bill rate is 5% and the market risk premium is 5.5%.According to the CAPM,what is the expected return of J.R.'s portfolio?

A) 5.50%
B) 6.16%
C) 10.00%
D) 10.50%
E) 11.16%

Question

J.R.has a three stock portfolio.Details of the portfolio are provided in the table.If the T-bill rate is 5% and the market risk premium is 5.5%.According to the CAPM,what is the expected return of J.R.'s portfolio?

A) 5.50% 
B) 6.16% 
C) 10.00% 
D) 10.50% 
E) 11.16%

Quizplus · Accepted Answer

In order to find the return on the portfolio as a whole, we must first find the portfolio beta. Take the weighted average of the individual betas to find the portfolio beta. β_p = w₁β₁ + . . . + w_nβ_n β_p = (0.3 × 1.6) + (0.4 × 1.0) + (0.3 × 0.8) β_p = 0.48 + 0.4 + 0.24 = 1.12 Use the beta to compute the return on the portfolio. E(k_p) = k_F + β_p[E(k_M) - k_F] E(k_p) = 0.05 + 1.12 × 0.055 E(k_p) = 0.05 + 0.0616 = 0.1116 or 11.16%

JRHas a Three Stock Portfolio