# Portfolio Solution

Problem 1

1. A) Portfolio A:

Portfolio B:

By equating both the equation, we get:

Risk Premium of F1 = 0.03 or 3%

Risk Premium of F2 = 0.05 or 5%

1. B) Construction of unit portfolio by using Factor 1:

Portfolio using Factor 1:

 Weight of resulting unit portfolio: Weight of Portfolio A 60% Weight of Portfolio B 0% Weight of Risk-free asset 40%
1. Expected Return: (Return on Portfolio A*Weight of Portfolio A)+ (Return on Portfolio B*Weight of Portfolio B)+ (Return on Portfolio Risk-free asset*Weight of Risk-free asset)

= (19%*60%)+(22%*0%)+(6%*40%)

= 13.80%

1. Portfolio beta = (Beta on Portfolio A*Weight of Portfolio A)+ (Beta on Portfolio A*Weight of Portfolio B)+ (Beta on Portfolio A*Weight of Risk-free asset)

=(1*60%)+(2*0%)+(0*40%)

= 0.60

1. C) Construction of unit portfolio by using Factor 2:

Portfolio using Factor 2:

 Weight of resulting unit portfolio: Weight of Portfolio A 0% Weight of Portfolio B 70% Weight of Risk-free asset 30%
• Expected Return: (Return on Portfolio A*Weight of Portfolio A)+ (Return on Portfolio B*Weight of Portfolio B)+ (Return on Portfolio Risk-free asset*Weight of Risk-free asset)

= (19%*0%)+(22%*70%)+(6%*30%)

= 17.20%

1. Portfolio beta = (Beta on Portfolio A*Weight of Portfolio A)+ (Beta on Portfolio A*Weight of Portfolio B)+ (Beta on Portfolio A*Weight of Risk-free asset)

=(1*0%)+(2*70%)+(0*30%)

= 1.40

1. D) Portfolio C:

= 0.06 + (0.03*2) + (0.05*0)

= 0.06 + 0.06 + 0

= 0.12 or 12%

Annual expected return = 16%

Since, actual return is less than annual expected return, hence portfolio is overvalued.

1. E) Since, the beta of portfolio C is 2 and return is 12% which is lower than the return of portfolio of A, B and risk-free asset i.e, it provides an expected return of 22% with same beta> hence, we should short sell the portfolio C to earn an income of 10% with no investment.

Income = Return on combined portfolio -Return on Portfolio C

= 22% - 12% = 10%

Weight are given below (in both conditions):

Weight of Portfolio A : 0%

Weight of Portfolio B : 100%

Weight of Portfolio Risk free asset : 0%

Problem 2

A)

Assets

Expected Return

SD

Correlation with P

Market beta

Stock A

21%

20%

95%

1.14

Stock B

34%

40%

80%

3.20

Portfolio P

8%

10%

100%

0.60

T-Bill

2%

0%

0%

-

Here,

Rf = 2%

Portfolio P

By using CAPM, calculate Rm:

RR = Rf + (Rm - Rf)*β

8% = 2% + (Rm - 2%)*0.60

Rm - 2% = 6%/0.60

Rm - 2% = 10%

Rm = 12%

Standard Deviation of market portfolio:

Systematic Risk of market = SD of portfolio P

 10% = (Beta of Portfolio P)*(SD of market) 10% = 0.60*SD of market SD of market = 10%/0.60 SD of market = 16.67%

B)

Expected Return of Stock A:

By using CAPM, calculate RR:

RR = Rf + (Rm - Rf)*β

RR = 2% + (12% - 2%)*1.90

RR  = 2% + 19%

RR = 21%

C)

Market beta of Stock B:

Beta = (SD of Stock A/ SD Portfolio P)*Correlation between Stock B and Portfolio P

Beta = (40%/10%)*0.80

Beta = 3.20

D)

Systematic Risk of Stock B = SD of portfolio*β

Systematic Risk of Stock B = 10%*3.20

Systematic Risk of Stock B = 32%

Problem 3

 A) Fund Expected Return SD Beta (RRsec - Rf)/βsec Ranking Fund A 8% 20% 0.50 0.12 1 Fund B 18% 60% 2.00 0.08 3 Fund C 16% 40% 1.50 0.09 2 T-bill 2% She should invest in Fund A. B) Risk Aversion coefficient = 1.50 Utility score of investment = Rf - 0.5*A*SD^2 = 0.08 - 0.5*1.50*(0.20)2 = 0.08 - 0.03 = 0.05 or 5% Now, to get the expected return of 5%, the proportion of Fund A in portfolio can be calculated as follows: Expected return = (RR of Fund A)*(Weight of Fund A) + (RR of T-bill)*(Weight of T-bill) Expected return = (0.08*Wa) + (0.02*Wt) Expected return = (0.08*Wa) + (0.02*(1-Wa)) 0.05 = 0.08Wa + 0.02 - 0.02Wa 0.05 = 0.06Wa +0.02 0.03 = 0.06Wa Wa = 0.03/0.06 Wa = 0.50 or 50% Weight of this fund in his portfolio = 50%

C)

 Calculation of Portfolio Beta Fund A 0.33 0.5 0.165 Fund B 0.33 2 0.66 Fund C 0.33 1.5 0.495 1.32 Calculation of Expected Return Fund A 0.33 0.08 0.0264 Fund B 0.33 0.18 0.0594 Fund C 0.33 0.16 0.0528 0.1386 Basis Portfolio Alpha AR - RR Calculation 0.1386 - [0.02+(0.10-0.02)*1.32] 0.013 Remarks Under-priced Basis Portfolio Sharpe Ratio (RRport - Rf)/βport (13.86%-2%)/1.32 0.08985

Problem 4

Variance of portfolio =  + Covariance                  [Covariance = Beta of stock * Variance of Market]

=  + 1*20*20

= 25+400

= 425

Standard deviation of portfolio =

= 20.62%

hihi

## Cite This work.

Assignment Hippo (2021) . Retrive from http://assignmenthippo.com/sample-assignment/portfolio-solution

"." Assignment Hippo ,2021, http://assignmenthippo.com/sample-assignment/portfolio-solution

Assignment Hippo (2021) . Available from: http://assignmenthippo.com/sample-assignment/portfolio-solution

[Accessed 15/06/2021].

Assignment Hippo . ''(Assignment Hippo,2021) http://assignmenthippo.com/sample-assignment/portfolio-solution accessed 15/06/2021.

Want to order fresh copy of the Sample Template Answers? online or do you need the old solutions for Sample Template, contact our customer support or talk to us to get the answers of it.

#### AssignmentHippo Features

##### On Time Delivery

Our motto is deliver assignment on Time. Our Expert writers deliver quality assignments to the students.

##### Plagiarism Free Work

Get reliable and unique assignments by using our 100% plagiarism-free.

##### 24 X 7 Live Help

Get connected 24*7 with our Live Chat support executives to receive instant solutions for your assignment.

##### Services For All Subjects

Get Help with all the subjects like: Programming, Accounting, Finance, Engineering, Law and Marketing.

##### Best Price Guarantee

Get premium service at a pocket-friendly rate at AssignmentHippo

#### FREE RESOURCES

• Assignment Writing Guide
• Essay Writing Guide
• Dissertation Writing Guide
• Research Paper Writing Guide

#### FREE SAMPLE FILE

• Accounts
• Computer Science
• Economics
• Engineering

#### Client Review

I was struggling so hard to complete my marketing assignment on brand development when I decided to finally reach to the experts of this portal. They certainly deliver perfect consistency and the desired format. The content prepared by the experts of this platform was simply amazing. I definitely owe my grades to them.