The investment in stock a is 1000 out of the total

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Unformatted text preview: portfolio? As the portfolio beta is a weighted average of the betas on each stock, the portfolio weight on each stock should be calculated. The investment in stock A is $1000 out of the total investment of $5000, thus the portfolio weight on stock A is 20%, whereas 30% and 50% are invested in stock B and C, respectively. The expected return on the portfolio is: n rP ¦w r 0.2 ˜ 10%  0.3 ˜ 12%  0.5 ˜ 14% 12.6% ii i1 - Similarly, the portfolio beta is: EP n ¦w E i i 0.2 ˜ 0.8  0.3 ˜ 1  0.5 ˜ 1.2 1.06 i1 - The portfolio investing 20% in stock A, 30% in stock B, and 50% in stock C has an expected return of 12.6% and a beta of 1.06. Note that a beta above 1 implies that the portfolio has greater market risk than the average asset. Download free ebooks at bookboon.com 35 Corporate Finance Risk, return and opportunity cost of capital 5.5 Portfolio theory Portfolio theory provides the foundation for estimating the return required by investors for different assets. Through diversificati...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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