Suppose that you consider forming a two-asset portfolio by investing 80% into BHP and 20% into TPG.

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Question:

Suppose that you consider forming a two-asset portfolio by investing 80% into BHP and 20% into TPG. The current price of BHP is $38.04 and has an expected rate of return of 0.93% with a beta of 0.88168080. The current price of TPG is $5.26 and has an expected return of -0.29% with a beta of 0.51899704.

5.1 Calculate the beta of the portfolio

5.2 Calculate the expected return of your portfolio

5.3 Calculate the standard deviation of your portfolio

5.4 Calculate the required return of your portfolio. Use 6% as market risk free premium and a risk-free rate of 2.98%.

5.5 Calculate the annual expected return of your portfolio by multiplying you answer in 5.2 by 12.

5.6 Is your portfolio overpriced or under-priced and why? Would you recommend Buy/Hold or Sell/Don't Buy?

5.7 Using your above answers draw the Security Market Line. Label X-axis, Y-axis and intercept. Clearly present values on X and Y-axis when you locate your portfolio in the graph.

6. BHP has an average monthly return of 0.0093 and a standard deviation of 0.0794. Calculate a 95% prediction interval and interpret your answer.