Computing Beta and Risk Premium
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I. Compute the expected return and the volatility of return of a portfolio that has a portfolio share of 0.9 in the S&P 500 and 0.1 in an emerging market index. The S&P 500 has a volatility of return of 15 percent and an expected return of 12 percent. The emerging market has a return volatility of 30 percent and an expected return of 10 percent. The correlation between the emerging market index return and the S&P 500 is 0.1.
II. If the S&P 500 is a good proxy for the market portfolio in the CAPM, and the CAPM applies to the emerging market index, use the information in question I to compute the beta and risk premium for the emerging market index.
III. Compute the beta of the portfolio described in question II with respect to the S&P 500.
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This solution provides step by step calculations for computing beta and risk premium for market portfolios.
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I. Compute the expected return and the volatility of return of a portfolio that has a portfolio share of 0.9 in the S&P 500 and 0.1 in an emerging market index. The S&P 500 has a volatility of return of 15 percent and an expect¬ed return of 12 percent. The emerging market has a return volatility of 30 percent and an expected return of 10 percent. The correlation ...
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