Question
You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $5,500 of Share
You are a financial investor who actively buys and sells in the securities market. Now you have a portfolio, including four shares: $5,500 of Share A, $4,600 of Share B, $5,700 of Share C, and $2,500 of Share D . Required: a) Compute the weights of the assets in your portfolio.(2 marks) b) If your portfolio has provided you with returns of 5.7%, 10.5%, 8.7% and 13.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period. (2 marks) c) Assume that expected return of the stock A in your portfolio is 13.2%. The risk premium on the stocks of the same industry are 6.8%, betas of these stocks is 1.2. Calculate the risk-free rate of return using Capital market pricing model (CAPM). (2 marks) d) You have another portfolio that comprises of two shares only: $500 blue chip shares and $700 junk shares. Below is the data of your portfolio: Blue Chips Junk Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4 Compute the expected return of your portfolio. (2 marks) e) Compute the expected risk (standard deviation) of the portfolio. (2 marks)
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