Question 3 Peter is a financial investor who actively buys and sells in the securities market. Peter has a portfolio which provided the returns of 13.7%, 10.5%, - 11.7%, 25.5% and 19.2% over the past five years, respectively. Required:Calculate the arithmetic and geometric average returns of Peter’s portfolio for this five-year period.Assume that the expected return of the share A in Peter’s portfolio is 15.4%. The market risk premium is 6.8%, Government Bond rate of return is 7.2%. Calculate the beta co-efficient of this share using the Capital Asset Pricing Model (CAPM).Peter has just set up another portfolio that comprises of two shares only: $3,500 Blue shares and $4,700 Red shares. Below is the data of this portfolio: BlueRedExpected return17%23%Standard Deviation of return22%39%Correlation of coefficient (p)- 0.45 Compute the expected return and measure the risk of Peter’s portfolio by calculating the portfolio standard deviation.

Given: Year Return 1 13.70% 2 10.50% 3 -11.70% 4 25.50% 5 19.20% Expected return…

Answered: Peter is a financial investor who…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 18PROB

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Question 3

Peter is a financial investor who actively buys and sells in the securities market. Peter has a portfolio which provided the returns of 13.7%, 10.5%, - 11.7%, 25.5% and 19.2% over the past five years, respectively.

Required:

Calculate the arithmetic and geometric average returns of Peter’s portfolio for this five-year period.
Assume that the expected return of the share A in Peter’s portfolio is 15.4%. The market risk premium is 6.8%, Government Bond rate of return is 7.2%. Calculate the beta co-efficient of this share using the Capital Asset Pricing Model (CAPM).
Peter has just set up another portfolio that comprises of two shares only: $3,500 Blue shares and $4,700 Red shares. Below is the data of this portfolio:

	Blue	Red
Expected return	17%	23%
Standard Deviation of return	22%	39%
Correlation of coefficient (p)	- 0.45

Compute the expected return and measure the risk of Peter’s portfolio by calculating the portfolio standard deviation.

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