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math

Category: Coursework

Subcategory: Finance

Level: College

Pages: 1

Words: 275

Portfolio CalculationsStudent’s Name:
University Affiliation:
Portfolio Calculations
Expected return on a portfolio
There are several methods that can be used to calculate the returns on portfolio.
In this problem, it is in order to consider the CAPM formula (Heinz, 2013). Based on the information above and the formula, I have:
E (R1) =RF+B1 (E {Rm})-Rf
B1=0.9, Bm=1, Brf=0
ER1=0.09, Rf= 0.04
Expected returns is calculated by,
0.5*ER1+0.5*Rf
=0.5(0.09)+0.5(0.04)
=0.65
The value of the beta of the portfolio is found by calculating the weighted-average of the individual assets.
xB1+(1-x)Brf=bp=0.5
Substituting for the x values, I have the values of the weights as
X=0.5/0.9=0.5556
1-0.6667=0.4444
The weights are therefore 0.5556 and 0.4444
Erp=0.08
W1R1+W2R2=0.08
Taking R1=R2=0.5 and taking w2=1-w1,
W1=0.6667
W2=0.3333
Substituting the weights to find beta values, xB1+(1-x)Brf=bp=0.08
B1=.66
One of the assets has a beta of 2.20
Its weight is?
Use formula
xB1+(1-x)Brf=Bp=2.20
x=2.444
1-x=-1.444
The asset that is risky has a weight of 2.444 while that which is risk free has a weight of -1.444. The negative weight of the portfolio is an indication that shorting can be done within a market structure (Heinz, 2013). It is, therefore, an indication to the investors that they can practice shorting. Short selling is always meant for the negative weights, while the other type is for the non-negative weights (Heinz, 2013).

Reference
Heinz S., (2013). Investment in Practice: A note on the CAPM. Oxford University Press, London. United Kingdom.