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