Posted by Yinka on Thursday, November 15, 2012 at 10:18am.
A portfolio manager is managing a $10 million portfolio. Currently the portfolio is invested in the following manner: Investment Dollar Amount Invested Beta Electric Utility $2 million 0.6 Cable Company $3 million 0.8 Real Estate Development $3 million 1.2 International Projects $2 million 1.4 Required: a) What is the portfolio’s beta? b) If the risk free-rate is 5% and the market risk premium is 5.5 %, what is the portfolio’s required rate of return? c) If the expected return on the portfolio for the upcoming year is 9.5% with a standard deviation of 4.5%, what is the probability that the portfolio will have a return greater than its required return? What is the probability the portfolio would have a negative return? The portfolio manager is considering a change in the strategic focus of the portfolio; it will reduce its reliance on the electric utility investment, reducing the investment to $1 million and at the same time increasing the investment in international projects to $3 million. Explain what will happen to the portfolio’s beta, as well as the required rate of return for the portfolio. What you do expect to happen to the portfolio’s expected rate of return and its standard deviation?
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