Review Questions
Question 1
Suppose you are the money manager of a $2 million investment fund. The fund consists of four stocks
with the following investments and betas.
Stock Investment Beta Expected Return
A $ 200 000 1.50 16%
B $ 300 000 -0.50 17%
C $ 500 000 1.25 20%
D $1000 000 O.75 18%
If the market required rate of returns is 28 and the risk-free is 12%:
Calculate:
(a) calculate the expected return for the portfolio
Step 1 – Calculate the weights if they are not given: (percentage of investment in each stock
A = 200/2000 x 100 = 10%
B = 300/2000 x 100 = 15%
C= 500/2000 x 100 = 25%
D = 1000/2000 x 100 = 50%
Step 2 – multiply the weights x the returns on each stock - and sum all
.10(16) + 0.15(17) + 0.25(20) + 0.50(18)
1.6 + 2.55 +5 + 9 = 18.15%
(b) calculate beta for the portfolio
Weights x beta for each stock, then sum all
.10(1.5) + 0.15(-0.50) + 0.25(1.25) + 0.50(0.75
= 1.6375
Question 1
Suppose you are the money manager of a $2 million investment fund. The fund consists of four stocks
with the following investments and betas.
Stock Investment Beta Expected Return
A $ 200 000 1.50 16%
B $ 300 000 -0.50 17%
C $ 500 000 1.25 20%
D $1000 000 O.75 18%
If the market required rate of returns is 28 and the risk-free is 12%:
Calculate:
(a) calculate the expected return for the portfolio
Step 1 – Calculate the weights if they are not given: (percentage of investment in each stock
A = 200/2000 x 100 = 10%
B = 300/2000 x 100 = 15%
C= 500/2000 x 100 = 25%
D = 1000/2000 x 100 = 50%
Step 2 – multiply the weights x the returns on each stock - and sum all
.10(16) + 0.15(17) + 0.25(20) + 0.50(18)
1.6 + 2.55 +5 + 9 = 18.15%
(b) calculate beta for the portfolio
Weights x beta for each stock, then sum all
.10(1.5) + 0.15(-0.50) + 0.25(1.25) + 0.50(0.75
= 1.6375
