Calculate beta and required rate of returns of the respective portfolio by using Capital Asset Pricing Model (CAPM).  Assume that a beta of 1.45 and 0.76 for Stock A and Stock B respectively. A return on a market portfolio (Rm) of 9 percent and a risk-free rate (Rf) of 2 percent. (Calculations must be done manually. Show all workings:

 

Portfolio:	P1	P2	P3	P4	P5	P6	P7	P8	P9	P10	P11
Stock A	100%	90%	80%	70%	60%	50%	40%	30%	20%	10%	0%
Stock B	0%	10%	20%	30%	40%	50%	60%	70%	80%	90%	100%
Beta	BP1	BP2	BP3	BP4	BP5	BP6	BP7	BP8	BP9	BP10	BP11
Required Return	RP1	RP2	RP3	RP4	RP5	RP6	RP7	RDP8	RP9	RP10	RP11

 

(b)   Which portfolio(s) is/are good to create? Provide a reason.

(4 marks)

 

(c)   Which portfolio(s) is/are overvalued and undervalued?

(11 marks)

Answer rating: 100% (QA)

To calculate the required rate of return for each portfolio we will use the CAPM formula Required Re... View the full answer