PORTFOLIO THEORY – EXERCISES 2
EXERCISE 1
Suppose that the conditions for the CAPM are fully respected. The market portfolio expected return is 5% and
the risk-free rate is 1%. We create a portfolio in which 80% of the wealth is placed in the security A whose beta
is 𝛽𝐴 = 0.5, 50% in the security B whose beta is 𝛽 𝐵 = 1.5, and we short the risk-free asset. What is the expected
return of the portfolio?
EXERCISE 2
The market portfolio has an expected return of 5%, and the risk-free rate is 1%. Suppose that the conditions for
the CAPM are fully respected. The expected return of a portfolio in which 40% of the wealth if placed in stocks S
and 60% in an ETF that replicates the market portfolio with zero tracking error is 7%. What is the beta of the
stocks S?