Question

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 1

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%