(Portfolio beta): Augustynska & Smolecki Investments, LLC manages a portfolio consisting of the following stocks for Annie Lee Holding Company.
Stock Investment Beta
MCD $150,000 0.50
BABA $250,000 0.80
VFINX $350,000 1.00
Part a: Suppose the Hansford & Kennedy Analytical Firm compile the following information:
6-month Treasury bill rate is 2.1%; 20-year Treasury note is 2.9%
The historical rate of VINX is 11.5%; Forward rate of VINX is 9.9%
Calculate the expected rate of return for Annie Lee Holding Company. If Annie Lee desires a 15% return, will this portfolio meet her expectations?
Beta of Portfolio = (0.15 * 0.5) + (0.25 * 0.8) +(0.35 * 1) + (0.45 * 2.2)= 1.615
Rf is generally long-term US bonds/notes, in this case, Rf = 2.9%
Rm = Historical Returns of Index = 11.5%
Expected return on portfolio = 2.9% + 1.615 * (11.5% - 2.9%) = 16.789%
expected return is greater than 15 %. So, this portfolio is suitable for Annie Lee
Part b: Suppose the Frederick, and Magana Analytical Firm are asked to assess removing MCD from the portfolio and replace it with MSFT, which has a beta of 1.50. What is the new expected return on this portfolio? If the famous fashionista firm of Martinez and Mata expect a return of 20%, would they be interested in this portfolio? Why or why not?