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Portfolio beta and component betas

EXERCISE 01

Risk-free rate = 4.000%; market risk premium = 6.000%.

AssetWeightBeta
10.600002.16
20.400000.69
  1. A.Calculate portfolio beta and expected return.

A.

βP=∑iwiβi,E[RP]=rf+βPMRP\beta_P=\sum_iw_i\beta_i,\quad E[R_P]=r_f+\beta_PMRP
βP=(0.6)(2.16)+(0.4)(0.69)≈1.572\beta_P=(0.6)(2.16)+(0.4)(0.69)\approx 1.572
E[RP]=0.04+(1.572)(0.06)≈0.13432E[R_P]=0.04+(1.572)(0.06)\approx 0.13432

Beta = 1.57200; expected return = 13.432%.