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Jeanne Lewis is attempting to evaluate 2 possible portfolios consisting of the same 5 asse

Jeanne Lewis is attempting to evaluate 2 possible portfolios consisting of the same 5 asse

Jeanne Lewis is attempting to evaluate 2 possible portfolios consisting of the same 5 assets but held in different proportions. She is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data:

Portfolio Weights

Asset Asset Beta Portfolio A Portfolio B

1 1.27 6% 25%

2 0.75 30% 13%

3 1.21 10% 25%

4 1.09 10% 16%

5 0.86 44% 21%

Total 100% 100%

a. Calculate the betas for portfolios A and B.

b. If the risk-free rate is 2.62.6% and the market return is 9.7%, calculate the required return for each portfolio using the CAPM.

c. Then assume you now have the following annual returns for each investment:

Asset Returns

1 17.5%

2 13.5%

3 14.0%

4 12.0%

5 8.5%

Using the required return for each portfolio and the additional return data, determine which portfolio you would choose and explain why.

Abhinav 04-Dec-2019

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