Suppose you use J$100 000 to construct a portfolio comprising of Stock A and stock B, such that you invest J$30 000 and J $70 000 in Stock A and Stock B respectively. Also you have done some research and estimated the Beta (B) of the Stocks to be: Stock A=0.75 and Stock B=0.50.

Use the expected returns calculated for each stock in(b), above to calculate the following:

i. The expected return on the portfolio. (4 marks)

ii. Calculate the expected beta of the portfolio. (3 marks)

iii. Explain briefly how you would approach diversifying this portfolio. (5 marks)

Formulas

Required: Calculate the portfolio expected return E (Rp) = ( Wa Ra) +( Wb Rb) +( Wc Rc) ++( Wd Rd) Wi = proportion of the portfolio total $ value represented by asset i Ri = return on asset i

Expected return on each state= (Weight of asset Return in the state)