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Solution Library
Calculation of Expected Return on Portfolio
Question
Over the next year, expected return on the S&P 500 index (proxy for the optimal risky portfolio), the SMB portfolio, and the HML portfolio are 11%, 6%, and 3%; standard deviation of the returns on the S&P 500 is 27%; risk free return is 2%.
Assuming that the CAPM is the appropriate asset pricing model, you estimate Bargain Buster Stores’ stock beta to be 1.45.
Your friend has created a portfolio that has a market beta of 0.65, but is highly sensitive to the Fama-French factors, with an SMB beta of 1.95 and an HML beta of 2.25. What is the expected return on her portfolio?
Summary: This question belongs to financial management and discuses about Fama-French factors and to determine expected return on portfolio.
Total word count: 10
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