Hi,
Just doing some revision of portfolio theory and in all my past preparation questions beta was given in the questions for the calculations
However in this question one step is asking you what is the beta of the portfolio and I am very unsure if I am doing it correctly
The narrative for the question is as follows:
Miss Deeds has invested in a two security portfolio comprising shares in Balnaslow Plc and Vatour Plc. She has put 80% of her money in Balnaslow and 20% in Vatour.
Balnaslow: ExpectedReturn = 12% & Standard Deviation = 10%
Vatour: ExpectedReturn = 8% & Standard Deviation = 6%
The correlation coefficient between the returns on Balnaslow and Vatour is 0.5. The Expected return on the market portfolio is 10%. The correlation between returns on Miss Deeds’s portfolio and those of the market portfolio is 0.6 and the standard deviation of the market portfolio is 4%.
From what I know Beta = [correlation of the investment in the market] * (Ri/Rm)
So for this I took the correlation as [0.6] from question
return from the market as 10%
//return from the investment as (12+8)/2 =10%
return from investment with weighted returns (.8)(12) + .2(8) = 11.2%
Do I use weighted return?
so it comes out as 0.6 * (10/10) = 0.6 as the BETA
Any help would be greatly appreciated as I just don't know if my calculations and values taken for the formulae are correct
Thanks in advance for any help
Kind regards,
Roger
Just doing some revision of portfolio theory and in all my past preparation questions beta was given in the questions for the calculations
However in this question one step is asking you what is the beta of the portfolio and I am very unsure if I am doing it correctly
The narrative for the question is as follows:
Miss Deeds has invested in a two security portfolio comprising shares in Balnaslow Plc and Vatour Plc. She has put 80% of her money in Balnaslow and 20% in Vatour.
Balnaslow: ExpectedReturn = 12% & Standard Deviation = 10%
Vatour: ExpectedReturn = 8% & Standard Deviation = 6%
The correlation coefficient between the returns on Balnaslow and Vatour is 0.5. The Expected return on the market portfolio is 10%. The correlation between returns on Miss Deeds’s portfolio and those of the market portfolio is 0.6 and the standard deviation of the market portfolio is 4%.
From what I know Beta = [correlation of the investment in the market] * (Ri/Rm)
So for this I took the correlation as [0.6] from question
return from the market as 10%
//return from the investment as (12+8)/2 =10%
return from investment with weighted returns (.8)(12) + .2(8) = 11.2%
Do I use weighted return?
so it comes out as 0.6 * (10/10) = 0.6 as the BETA
Any help would be greatly appreciated as I just don't know if my calculations and values taken for the formulae are correct
Thanks in advance for any help
Kind regards,
Roger