A portfolio contains four assets. Asset 1 has a beta of.8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio, the expected return on the portfolio and the market?
A) 1.19; 6.57%; 6.00%
B) 1.19; 7.14%; 6.00%
C) 1.19; 10.14%; 9.00%
D) 1.25; 10.50%; 6.00%
E) 1.25; 10.50%; 9.00%

Question

Quizplus · Accepted Answer

The portfolio beta is calculated as the weighted sum of the individual betas: (0.3 * 0.8) + (0.3 * 1.1) + (0.2 * 1.5) + (0.2 * 1.6) = 1.19. The expected return on the portfolio is calculated using the CAPM formula: Risk-free rate + (Portfolio beta * Market risk premium) = 3% + (1.19 * 6%) = 10.14%. The expected return on the market is the risk-free rate plus the market risk premium: 3% + 6% = 9.00%.

A Portfolio Contains Four Assets