The Question is incomplete. See complete question below.
Complete Question
We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −0.3.
a. If the interest rate on Treasury bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to the CAPM? (Enter your answer as a whole percent.)
b. Supose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio
Answer:
a. Expected return on the share = 1%
b. Portfolio Investment = 61%
Explanation:
a.
Expected return on the share is calculated as:
r = rf+ β(rm - rf)
Given
rf = Interest rate on Treasury bills = 4%
β = Beta = -0.3
rm = Expected return on the market portfolio = 14%
r = 4% -0.3(14% - 4%)
r = 4% - 0.3(10%)
r = 0.04 - 0.3(0.10)
r = 0.04 - 0.03
r = 0.01
r = 1%
b.
Portfolio Investment is calculated as;
(I * r) + ((1 - I) * (β))
Where I = Investment = 70%
r = 1
β = Beta = -0.3
Investment = (70% * 1%) + ((1 - 70%) * (-0.3))
Investment = (70% * 1) - (30% * 0.3)
Investment = (0.7 * 1) - (0.3 * 0.3)
Investment = 0.61
Investment = 61%
