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 Subject: Finance Category: Business and Money > Finance Asked by: lrdgz-ga List Price: \$10.00 Posted: 18 Sep 2005 12:31 PDT Expires: 18 Oct 2005 12:31 PDT Question ID: 569424
 ```Suppose you have invested \$50,000 in the following four stocks: Stock A - \$10,000 - invested beta 0.7 Stock B - \$15,000 - invested beta 1.2 Stock C - \$12,000 - invested beta 1.4 Stock D - \$13,000 - invested beta 1.9 The risk-free rate is 5% and the expected return on the market portfolio is 18%. Based on the Capital Asset Pricing Model, what is the expected return on the above portfolio?``` Clarification of Question by lrdgz-ga on 18 Sep 2005 13:21 PDT ```I would appreciate a response within the next couple of hours. I'll make it worth your while in a tip! Thanks in advance for expediting your response.```
 ```Lrdgz ? In this case, the portfolio?s expected returns are simply a weighted average of the returns of each of the stocks. The assumptions here may be as important as the answer. The CAPM predicts: Rc = rf + ßc(rM - rf) Where, Rc is the company's expected return on capital rf is the risk-free return rate, usually a long-term U.S. Treasury bill rate rM is the expected return on the entire market of all investments. Most measures use a common broad index, most often the S&P500 over the past 5 or 10 years ßc is the company's Beta, based on its covariance with the market. Our Rc numbers for each stock are: Stock A (20%): 5% + 0.7 * 13% = 14.1% Stock B (30%): 5% + 1.2 * 13% = 20.6% Stock C (24%): 5% + 1.4 * 13% = 23.2% Stock D (26%): 5% + 1.9 * 13% = 29.7% The weighting of the portfolio should bring you the following returns: .20 * 14.1% + .30 * 20.6% + .24 * 23.2% + .26 * 29.7% = 22.29% The important assumption here is that your portfolio and that stocks A, B, C, D don?t have a high correlation in returns among themselves. In other words, you wouldn?t want them all in the same industry, like Atmel, Intel, Texas Instruments and National Semiconductor. Best regards, Omnivorous-GA```
 lrdgz-ga rated this answer: and gave an additional tip of: \$5.00 `Thanks so much for clarifying this for me.`