8/18/2019 69211_TUTORIAL 5(Q)

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DII5018-INTRODUCTION TO INVESTMENT

FO

TUTORIAL 5

MODERN PORTFOLIO

a) 

Using the capital asset pricing model (CAPM), find the required rate of return for

each of the following securities in light of the data given.

Security Risk-free rate Market return Beta

O 3% 10.3% 1.1

P 5% 11.5% 0.5

Q 4.5% 12.3% 2.3

R 5.3% 13.5% 4.5

S 3% 10.5% 0.4

 b) 

Assume you are considering a portfolio containing two assets, X and Y. Assets X

will represent 60% value of the portfolio and assets Y will account for the other

40%. The expected return over 5 years, 2014-2018 for each of these assets are

summarized in following table. Calculate the expected portfolio return for each

years.

 Expected Return (%)

Year Asset X Asset Y

2014 13 15

2015 14.5 14.5

2016 15 15.6

2017 16.5 16.3

2018 17 17.5

c) 

Assume you are considering a portfolio containing three assets, X, Y and Z. The

expected return for each assets are summarized in following table. Calculate the

expected portfolio return for each years.

 Assets Weighted Expected return

X 0.55 15%

Y 0.23 13%

Z 0.22 13.6%

d) 

Given market return is 15% and real rate of return is 13%. Currently, governmentestimates inflation premium is 4%. Using the capital asset pricing model (CAPM),

find the required rate of return for each of the following investments.

Securities Beta

A 1.2

B 0.3

C 0.45