Market Portfolio

9.1 How do lending (borrowing) possibilities change the Markowitz model?

9.4 What is the market portfolio?

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9.7 How can we measure a security’s contribution to the risk of the market portfolio?

9.10 What are the difficulties involved in estimating a security’s beta?

9.13 What is “the law of one price”?

9.21 What is a factor model?

9.25 How can APT be used in investment decisions?

 

Spreadsheet Exercises

9.1 Assume that the annual price data below is for General Foods and a broad stock market index, covering the period 2003–2018. Calculate the beta for General Foods. Use the ESTLIN function or the SLOPE function in the spreadsheet.

 

Year GF S&P
2018 40.58 1,211.92
2017 48.38 1,111.92
2016 40.96 879.82
2015 43.34 1,148.08
2014 55.38 1,320.28
2013 52.26 1,469.25
2012 59.49 1,229.23
2011 58.72 970.43
2010 45.93 740.74
2009 32.06 615.93
2008 21.93 459.27
2007 18.67 466.45
2006 17.24 435.71
2005 16.3 417.09
2004 9.29 330.22
2003 7.57 353.4

 

 

 

9.2 Given the information below, calculate the portfolio beta and the expected return on this two-stock portfolio using the CAPM.

If the weights were 50/50, would this increase or decrease the portfolio return?

If the market’s expected return had been 8 percent with the 60/40 weights, would this increase or decrease the portfolio return?

Market’s Expected Return 9%
Risk-Free Rate 2.50%
Beta for Bateman Industries 0.98
Beta for Advanced Solar Arrays 1.34
Weight for Bateman 60%
Weight for Solar Arrays 40%
Portfolio Beta  
Expected Return on the Portfolio  

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