Suppose we had the following investments: Security Amount

Question

Suppose we had the following investments:

Security	Amount Invested (Tk.)	Expected Return [E (R)]	Beta
Stock – A	1,000	8%	0.80
Stock – B	2,000	12%	0.95
Stock – C	3,000	15%	1.10
Stock – D	4,000	18%	1.40

Requirements:

b. What is the beta of the portfolio? Does this portfolio have more or less systematic risk than an average asset?

a. What is the expected return of this portfolio?

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Solution

Working Notes: Calculating Portfolio Weights (

)

1. Total Portfolio Investment:

2. Weight of Each Stock:
   • 
   • 
   • 
   • 

a. Expected Return of the Portfolio [

]

The expected return of a portfolio is the weighted average of the expected returns of the individual assets:

Answer (a): The expected return of the portfolio is 14.90%.

b. Beta of the Portfolio (

) and Systematic Risk

The beta of a portfolio is the weighted average of the betas of the individual securities:

Answer (b):

1. The portfolio beta () is 1.16.
2. An average asset or market portfolio has a beta of 1.0. Since the portfolio’s beta () is greater than 1.0, this portfolio has more systematic risk than an average asset.

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