Q:

A manager wishes to construct a portfolio by investing 25% in a stock half as volatile as the market, 25% in a stock twice as volatile as the market, 25% in the market itself, and finally, 25% into Treasury bills. If the market risk premium is 5% and the risk free rate is 3%, what's the expected return from this portfolio?
a) 6.75%
b) 7.38%
c) 8.00%
d) 4.75%

A:

The correct answer is: b)
Step 1. Find Portfolio Beta
Beta of the Portfolio
= (.25)(.5)+(.25)(2)+(.25)(1)+(.25)(0)
= 0.125 + 0.5 + 0.25 + 0
= 0.875

Step 2. Find E(R)
E(R) = Rf + B(Rm - Rf)
= 3% + (0.875)(5%)
= 7.38%
Note that the market risk premium is the difference between the expected market return on a market portfolio, and the risk-free rate. In this case, we were given the market risk premium, so further calculation was not needed.
2005 CFA Level 1 LOS: 12.1.D.h


RELATED FAQS

  1. When a floor broker asks a specialist, “How’s PDQ?” ...

    The correct answer is d) When the specialist gave the floor broker the quote of “59.20 to 35; 6 by 11,”  the quote meant ...
  2. A person purchases stock XYZ (an Over The Counter stock) from a company who is also ...

    The correct answer is c When the firm is a market maker in the stock then it must act as a principle. Principal is the main ...
  3. An individual made a lump-sum deposit into a variable annuity of $25,000 ...

    The correct answer is c). Early withdrawal from a non-qualified annuity--prior to age 59½, except for death or disability, ...
  4. A church that a registered representative (RR) attends plans to raise the funds necessary ...

    The correct answer is c) Although church bonds are normally considered to be exempt securities, the RR is obligated, by NASD ...
RELATED TERMS
  1. No results found.

You May Also Like

Related Articles
  1. No results found.
Trading Center