Question

Week 5
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a
portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and
$5,500 of Share D.
Required:
a) Compute the weights of the assets in Rachel’s portfolio? (2 marks)
b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past
four years, respectively. Calculate the geometric average return of the portfolio for this period. (2
marks)
c) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk
premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation
rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model
(CAPM). (2 marks)
d) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate the
expected return, variance and standard deviation of the portfolio. (4 marks)
State of economy Probability Rate of returns
Mild Recession 0.35 - 5%
Growth 0.45 15%
Strong Growth 0.20 30%

Answer 1

Thus the weight of A =32.6877%  and weight of B = = 18.40 % Weight of C = 38.4 %

Step-by-step explanation:

Total amount = $13,500 + $7,600 + $14,700 + $5,500 = $41,300

Calculate the weight of A:

Weight of A = Amount invested in A / Total investment

Weight of A = $13500 / $41,300

Weight of A =32.6877%

Now calculate the weight of B:

Weight of B = Amount invested in B / Total investment

Weight of B = $7,600 / $41,300 x 100 = 18.40 %

Thus the weight of A =32.6877%  and weight of B = = 18.40 %

Weight of C = Amount invested in B / Total investment

Weight of C = $5,500 / 14,300 $ x 100 = 0.384 x 100 = 38.4 %