Based on the below analysis, which portfolio would you suggest to Sandy? Why? Risk-free rate (rf) =
Question:
Based on the below analysis, which portfolio would you suggest to Sandy? Why?
Risk-free rate (rf) = 3%
Portfolio 1: 100% allocation to Acme Company expected return: E(rp)=w1 x E(r1) + Wrfx Rrf= E(rp)= 1x6.0%+0x 0.03=6%Portfolio beta: Beta=w1x B1=1x0.85=0.85 Portfolio 2: 100% allocation to Smith CorpExpected return: 1 x 8.5% +0 x 3%= 8.5%Portfolio beta: beta=1 x 1.05= 1.05 Portfolio 3: 100% allocation to Jones IncExpected return: 1x12.0% + 0 x 3%=12.0%Portfolio beta: beta= 1x 1.80=1.80 Portfolio 4: 100% allocation to risk free asset Expected return: 1x3%= 3.0%Portfolio beta: beta=0
Portfolio 5: equal allocation to each stock and risk-free assetx(6.0%+8.5% + 12.0%)+1/4 x 3%=26.5%/4 +0.75%=6.6875% Portfolio beta: beta 1/4x (0.85+1.05+1.80)=3.7/4=0.925 Portfolio 6: equal allocation to the three identified stocks 1/3 x (6.0% +8.5% +12.0%)= 26.5%/3=8.833%Portfolio beta: beta= 1/3 x(0.85 + 1.05 +1.80= 3.7/3=1.2333 Portfolio 7 50% invested in Smith Corp and 50%investedin risk free asset0.5x 8.5% +0.5 x 3%=5.75%portfolio beta=0.5x 1.05=0.525 portfolio 1: 6.0% return and 0.85 beta
portfolio 2: 8.5% return and 1.05 beta
portfolio 3: 12.0% return and 1.80 beta
portfolio 4: 3.0% return and 0 beta
portfolio 5: 6.6875% return and 0.925 beta
portfolio 6 8.8333% return and 1.233 beta
portfolio 7 5.75% return and 0.525 beta