Portfolio change of required return calculaor

A

archived_user

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Practice Problem, please assist on how to arrive to the answer
STOCK ALLOCATION BETA DEVIATION
AAA 35% 0.90 53.00%
BBB 20% 1.50 57.00%
CCC 15% 1.20 60.00%
DDD 30% 0.50 64.00%
Portfolio Manager Jones calculated above portfolio beta to be 0.945 and expected return as 13.09 %
Jones plans to replace AAA with the same amount of additional DDD. Risk free rate is 6% and Market Risk Premium is 7.50%
If Jones proceeds with his plans, assuming market equilibrium, how many percentage points will the portfolio’s required return change: ____________
 
Revise the new beta using the new weights, then calculate using the CAPM.
I don’t think deviations are needed here.
 
Deviation is not needed, so revise the new rate and use CAPM, that will give you the solution.
 
difference in return between DDD and AAA = (0.5 - 0.9) * 7.5 = -3%
now AAA is being replaced by same amount of DDD
so diff in return = 35% * -3% = -1.05%
 
Caculate CAPM expected return of each holding:
E[RAAA] = 0.06 + 0.9*0.075 = 0.1275
E[RBBB] = 0.06 + 1.5*0.075 = 0.1725
E[RCCC] = 0.06 + 1.2*0.075 = 0.15
E[RDDD] = 0.06 + 0.5*0.075 = 0.0975
Expected return based on old weights = .1309
Calculate expected portfolio return based on new weights:
AAA = 0%
BBB = 20%
CCC = 15%
DDD = 65%
Expected return based on new weights = (0.2 * 0.1725) + (0.15 * 0.15) + (0.65 * 0.0975) = .120375
.1309 - .120375 = .010525 or 1.0525% difference in return
 
You must log in or register to reply here.
Back
Top