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    Using capital-asset-pricing model what is the expected return of a portfolio

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    Please detail calculations so that they can be posted into an excel spreadsheet and please explain how the calculations were devised.

    Suppose you have invested $ 50,000 in the following four stocks:

    Security Amount Invested Beta
    Stock A 10,000 0.7
    Stock B 15,000 1.2
    Stock C 12,000 1.4
    Stock D 13,000 1.9

    The risk-free rate is 5 percent and the expected return on the
    market portfolio is 18 percent.

    Based on the capital-asset-pricing model, what is the expected return on the above
    portfolio?

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    Solution Preview

    According to the capital asset pricing model (CAPM), the expected return of a security (or portfolio) should follow this relationship:

    E(r) = rf + beta*( E(rm) - rf)

    where:

    E(r) is the expected return of the security or portfolio
    rf is the risk-free rate of return (in this case, 0.05)
    E(rm) is the expected return of the market portfolio (in this case, ...

    Solution Summary

    The solution shows the formulas needed to calculate the answer to the question, and then applies the formulas for an answer.

    $2.19

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