1 . a. Lawrence used $20,000 to purchase $5000 each of four stocks: Stock A has βΠ= 1.2; stock B has βΠ= 1.4; stock C has βc = 1.6; and stock D has βD = 1.8. What is Lawrence's portfolio beta? If the risk-free rate is 2%, and the market risk premium (Rmbar â Rf) is 8%, what is Lawrence's expected rate of return on this portfolio?
b. Claire has $10,000. She is very competitive with her brother Lawrence, and wants a portfolio that has the same expected rate of return as his. However, she plans to invest in a stock mutual fund (like an S&P 500 index fund, for instance), while possibly borrowing at the risk-free rate from her broker, to achieve her goal. What are her portfolio weights, and what is the standard deviation of her portfolio's return? Assume the market standard deviation is Ïm = 9%.
c. Can we assume that Lawrence's portfolio has the same standard deviation of return as Claire's? Why or why not? Which strategy is generally considered more prudent, Lawrence's or Claire's, and why?
1 . a. Lawrence used $20,000 to purchase $5000 each of four stocks: Stock A has βΠ= 1.2; stock B has βΠ= 1.4; stock C has βc = 1.6; and stock D has βD = 1.8. What is Lawrence's portfolio beta? If the risk-free rate is 2%, and the market risk premium (Rmbar â Rf) is 8%, what is Lawrence's expected rate of return on this portfolio?
b. Claire has $10,000. She is very competitive with her brother Lawrence, and wants a portfolio that has the same expected rate of return as his. However, she plans to invest in a stock mutual fund (like an S&P 500 index fund, for instance), while possibly borrowing at the risk-free rate from her broker, to achieve her goal. What are her portfolio weights, and what is the standard deviation of her portfolio's return? Assume the market standard deviation is Ïm = 9%.
c. Can we assume that Lawrence's portfolio has the same standard deviation of return as Claire's? Why or why not? Which strategy is generally considered more prudent, Lawrence's or Claire's, and why?
Related questions
Selena invests the following sum of money in common stock having expected returns as follows:
| Common Stock | Amount Invested in $ | Expected Return | Beta of Stock β |
| WOOPS | 5,000 | 0.14 | 0.6 |
| KBOOM | 10,000 | 0.16 | 0.8 |
| JUDY | 6,000 | 0.17 | 0.85 |
| UPDWN | 8,000 | 0.13 | 0.5 |
| SPROUT | 4,500 | 0.20 | 1.1 |
| RINGG | 7,500 | 0.15 | 0.65 |
| EIEIO | 9,000 | 0.18 | 0.9 |
a) What is the expected return on her portfolio based on the amount invested above?
b) Calculate the systematic risk, β of the portfolio.
c) Does the portfolio have more or less systematic risk compared to the average market portfolio?
d) If return on the market (Rm) is 14% and the risk free rate (Rf) is 4%, what would be the return of the portfolio according to Capital Asset Pricing Model (CAPM)?
e) If Selena wants to get 12% return from this portfolio, is this the appropriate portfolio for her? Explain your reason using your answer in (A) and (D).
f) If she still wants to invest in this portfolio, what should she do in terms of adjusting the weight of the stock? Give your answer based on the amount invested in UPDWN and SPROUT stocks.
