User: (A). (1).Mr. Nimish holds the following portfolio. (10 marks) Share Beta Investment Alpha 0.

9 Rs.12, 00,000 Beta 1.5 Rs. 3, 50,000 Carrot 1.0 Rs. 1, 00,000 What is the expected rate of return on his portfolio, if the risk rate is 7 per cent and the expected return on the market portfolio is 16 per cent? Note: Please Wait Note: A (1) : For given bata (), [ the required rate of return is obtained asE(r p ) = r f + (r m r f ) E(r p ) = Expected return from portfolior f = Risk free rate of return (Note: individual investments may consider asrisk free) = Systematic risk of asset, betar m = Expected rate on market portfolio (r f = 7% = 0.07, r m = 16% = 0.16) Therefore, E(r p ) = 0.07 + (0.16 0.07) = 0.07 + 0.09 ShareBetaE(r) = r f + (r m-r f )Investment(Rs.)WeightWeightedReturnAlpha0.90.15112,00,0000.7270.110Beta1.50.2053,50,0000.2120.043 Carrot1.00.1601,00,0000.0610.010Portfolio1.0330.16316,50,0001.0000.163Portfolio Beta is the simple weighted average of the betas of three shares.ie, portfolio = 0.9 X 0.727 + 1.5 X 0.212 + 1 X 0.061 = 1.033

Answer A (1): For given bata (), the required rate of return is obtained as E(rp) = rf (rm rf) E(rp) = Expected return from portfolio rf = Risk free rate of return (Note: individual investments may consider as risk free) = Systematic risk of asset, beta rm = Expected rate on market portfolio (rf = 7% = 0.07, rm = 16% = 0.16) Therefore, E(rp) = 0.07 (0.16 0.07) = 0.07 0.09 Share Beta E(r) = rf (rm-rf) Investment (Rs.) Weight Weighted Return Alpha 0.9 0.151 12,00,000 0.727 0.110 Beta 1.5 0.205 3,50,000 0.212 0.043 Carrot 1.0 0.160 1,00,000 0.061 0.010 Portfolio 1.033 0.163 16,50,000 1.000 0.163 Portfolio Beta is the simple weighted average of the betas of three shares. ie, portfolio = 0.9 X 0.727 1.5 X 0.212 1 X 0.061 = 1.033