What must be the beta of a portfolio with E(rP)=13.40%, if rf=6% and E(rM)=10%? (Round your...

Question:

What must be the beta of a portfolio with E(rP)=13.40%, if rf=6% and E(rM)=10%? (Round your answer to 2 decimal places.) Explain.

Portfolio Beta:

A portfolio is created when different investments are combined together. One of the reasons for combining investments is to lower the level of risks. The risks in a portfolio are measured using the beta. The beta factor specifically measures systematic risks.

Answer and Explanation:

The expected return on the portfolio is computed as follows:

  • {eq}\text{Expected return on portfolio = Risk-free rate + (Market return-Risk free rate} ) \times \beta {/eq}
  • Expected return=13.40%
  • Risk-free rate=6%
  • Expected return on market=10%
  • {eq}13.4\% = 6\% + (10\%-6\% ) * \beta {/eq}
  • {eq}\dfrac{13.4\% -6\% }{ (10\%-6\% ) }= \beta {/eq}
  • {eq}\beta=1.85 {/eq}

Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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