Problem:
Use the following information to answer the questions below.
|
Security
|
Return
|
Standard Deviation
|
Beta
|
|
A
|
15%
|
8%
|
1.2
|
|
B
|
12%
|
14%
|
0.9
|
a. Which of A and B has the least total risk? The least systematic risk?
b. What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the funds invested in B?
c. Calculate the risk free rate of return and the market risk premium (i.e., Rf and RM - Rf).
d. What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B, and 40% in the risk-free asset? (For questions (d) and (e), assume the risk free rate of return is 5%.)
e. What is the portfolio expected return with 125% invested in A and the remainder in the risk-free asset via borrowing at the risk-free interest rate?
f. What is the beta of the portfolio created in part (e)?
Additional Information:
This question basically belongs to Finance as well as it discusses about computing systematic risk of a portfolio and the expected return from the portfolio. These computations have been presented in the solution.