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[solution] » Mr. Mlachake is currently holding a portfolio consisting of

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Mr. Mlachake is currently holding a portfolio consisting of
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Mr. Mlachake is currently holding a portfolio consisting of shares of four companies quoted on the Bahati Stock Exchange as follows:

           

Company

Number of shares held

Beta equity

co-efficient

Market price per share

Expected return on equity in the next year

%

A

B

C

D

20,000

30,000

30,000

20,000

1.12

0.89

0.70

1.60

65

50

45

80

18

23

11

17

            The current market return is 14% per annum and the treasury bills yield is 9% per annum.

Required:

            (i)         Calculate the risk of Mlachake?s portfolio relative to that of the market.     (  5 marks)

            (ii)         Explain whether or not Mlachake should change the composition of his portfolio.        (  9 marks)


i)The risk of the portfolio in this case will be measured by portfolio Beta (Bp)

 

relative to market portfolio beta.

 

n

 


 

Bp

 


 

B w

 

n

 


 

n

 


 

t 1

 


 

Where wn = weight based on market values of shares.

 

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