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You are putting together a portfolio made up of five different shares. You have decided on the weight of each share in the portfolio and
You are putting together a portfolio made up of five different shares. You have decided on the weight of each share in the portfolio and you have obtained information about the Betas of the shares. You have also obtained information about the markets current forecast of the expected return on each share Share Weight in Portfolio Beta Market's Forecast Return 1 10% 1.00 12% 2 25% 0.75 11% 3 15% 1.30 15% 4 30% 0.60 9% 5 20% 1.20 14% The risk-free rate is 4%. The expected return on the market portfolio is 10% Required: (i) Calculate the expected return on the portfolio based on the market's forecast return for each share. (ii) Calculate the portfolio beta. (iii) Using the Capital Asset Pricing Model, calculate the expected return for each of the shares and for the portfolio. (iv) Given the preceding information, draw the Security Market Line (SML) and plot the expected return and the market's forecast return for each of the shares (v) Identify which shares appear underpriced, overpriced or correctly priced
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