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Q: Stock Market ( Answered ,   1 Comment ) Question
 Subject: Stock Market Category: Business and Money > Finance Asked by: doogieh59-ga List Price: \$10.00 Posted: 29 Mar 2005 09:14 PST Expires: 28 Apr 2005 10:14 PDT Question ID: 502071
 ```Made an investment of \$30,000 in the following stocks. A) \$5,000 with a beta of 0.75 B) \$10,000 with a beta of 1.10 C) \$8,000 with a beta of 1.36 D) \$7,000 with a beta of 1.88 The risk-free rate is 4 percent and the expected return on the market portfolio is 15 percent. Based on the CAPM, what is the expected return on the above portfolio?``` Subject: Re: Stock Market Answered By: markj-ga on 29 Mar 2005 10:53 PST Rated: ```doogie59 -- Your answer is 16.93%. Here is how you can reproduce it for yourself. Since you know the risk-free rate, the expected market return and the beta(a) of the assets in your portfolio, you can use the calculator at this linked site to quickly determine the return on each stock in the portfolio: Money Chimp: CAPM Calculator http://www.moneychimp.com/articles/valuation/capm.htm Using that calculator, the expected return for each of the stocks in your posited portfolio are: A) 11.5% B) 15% C) 17.6% D) 22.8% To determine the return on the entire portfolio, I first calculated the amounts in dollars of the expected return on each stock in the portfolio, The results of this calculation are as follows: A) \$575 B) \$1500 C) \$1408 D) \$1596 I then added these amounts and calculated the percentage that their sum (\$5079) represents of the value of the entire portfolio (\$30,000). The result of this calculation was 16.93% Additional Information: Here, from Forbes Financial Glossary, is the definition of "Expected Return": "Expected return The expected return on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P 500 and the historic U.S. Treasury bond) multiplied by the assets beta. The conditional expected return varies through time as a function of current market information." Search Strategy: I found the calculator (and much other information about expected rates of return) using the following Google search: expected market return equals beta ://www.google.com/search?num=100&hl=en&lr=&safe=off&c2coff=1&rls=GGLD%2CGGLD%3A2004-01%2CGGLD%3Aen&q=expected+market+return+equals+beta I am confident that this is answer you are seeking. If anything is unclear, please ask for clarification before rating the answer. markj-ga``` Clarification of Answer by markj-ga on 29 Mar 2005 14:08 PST ```doogie59 -- While my methodology was right on, I misread your question and used the wrong figure as the expected market return in my calculation. (Thanks to r0ug2-ga for noticing the (critical typo. The correct answer in 18.2% and here is a rewrite of the answer with the corrected breakdown of the calculations: Your answer is 18.2%. Here is how you can reproduce it for yourself. Since you know the risk-free rate, the expected market return and the beta(a) of the assets in your portfolio, you can use the calculator at this linked site to quickly determine the return on each stock in the portfolio: Money Chimp: CAPM Calculator http://www.moneychimp.com/articles/valuation/capm.htm Using that calculator, the expected return for each of the stocks in your posited portfolio are: A) 12.25% B) 16.10% C) 18.96% D) 24.68% To determine the return on the entire portfolio, I first calculated the amounts in dollars of the expected return on each stock in the portfolio, The results of this calculation are as follows: A) \$612.50 B) \$1610 C) \$1516.80 D) \$1727.60 I then added these amounts and calculated the percentage that their sum (\$5466.90) represents of the value of the entire portfolio (\$30,000). The result of this calculation was 18.2% Additional Information: Here, from Forbes Financial Glossary, is the definition of "Expected Return": "Expected return The expected return on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P 500 and the historic U.S. Treasury bond) multiplied by the assets beta. The conditional expected return varies through time as a function of current market information." Search Strategy: I found the calculator (and much other information about expected rates of return) using the following Google search: expected market return equals beta ://www.google.com/search?num=100&hl=en&lr=&safe=off&c2coff=1&rls=GGLD%2CGGLD%3A2004-01%2CGGLD%3Aen&q=expected+market+return+equals+beta I am confident that this is answer you are seeking. If anything is unclear, please ask for clarification before rating the answer. markj-ga```
 doogieh59-ga rated this answer: ```The first answer was not correct, but the correct answer came through very soon after the first response from the same researcher. I think that is fantastic!``` ```Damned. Maybe I miss the point but it seams to me that you use '14%' as the return rate on the benchmark portfolio instead of 15% 4 + (15-4) * 0.75 = 12.25 and 4 + (14-4) *.0.75 = 11.5 Cheers``` 