Expected Returns and Portfolio Beta Calculation

How can we calculate the expected returns of News Corp and CBA shares using the CAPM model?

a. What is the expected return of News Corp shares?

b. What is the expected return of CBA shares?

c. What is the beta of a portfolio that consists of 70% News Corp shares and 30% CBA shares?

d. What is the expected return of a portfolio that consists of 70% News Corp shares and 30% CBA shares?

Answers

a. The expected return of News Corp shares is 12.7918%.

b. The expected return of CBA shares is 9.098%.

To calculate the expected return of News Corp shares using the CAPM, we use the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values, we have Expected Return = 5.7% + 1.47 * (10.4% - 5.7%) = 12.7918%.

Similarly, to calculate the expected return of CBA shares, we use the same formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values, we have Expected Return = 5.7% + 0.86 * (10.4% - 5.7%) = 9.098%.

For the remaining parts (c and d), we need additional information about the correlation between News Corp and CBA shares in order to calculate the requested values. Please provide that information to further calculate the portfolio beta and expected return of the combined portfolio.