P8-27 (similar to)

Portfolio return and betaPersonal Finance ProblemJamie Peters invested

$102,000

to set up the following portfolio one year ago:

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.

a.Calculate the portfolio beta on the basis of the original cost figures.

b.Calculate the percentage return of each asset in the portfolio for the year.

c.Calculate the percentage return of the portfolio on the basis of original cost, using income and gains during the year.

d.At the time Jamie made his investments, investors were estimating that the market return for the coming year would be

11%.

The estimate of the risk-free rate of return averaged

5%

for the coming year. Calculate an expected rate of return for each stock on the basis of its beta and the expectations of market and risk-free returns.

e.On the basis of the actual results, explain how each stock in the portfolio performed differently relative to those CAPM-generated expectations of performance. What factors could explain these differences?

a.

The

portfolio beta on the basis of the original cost figures is

1.18.

(Round to two decimal places.)b.The percentage return for asset A for the year is

8%.

(Round to two decimal places.)The percentage return for asset B for the year is

5.25%.

(Round to two decimal places.)The percentage return for asset C for the year is

20.31%.

(Round to two decimal places.)The percentage return for asset D for the year is

9.75%.

(Round to two decimal places.)c.

The

percentage return of the portfolio on the basis of original cost, using income and gains during the year is

10.96%.

(Round to two decimal places.)d.At the time Jamie made his investments, investors were estimating that the market return for the coming year would be

11%

and the estimate of the risk-free rate of return averaged

5%

for the coming year.

The

expected rate of return for asset A is

nothing%.

(Round to two decimal places.)

A $20,000 0.86 $1,600 $20,000 B $40,000 0.98 $1,100 $41,000 C $32,000 1.57 $0 $38,500 D $10,000 1.34 $475 $10,500