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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.
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