Expected Return (beta) and Expected Return (checking)

[Manas31]

Hi,

These values are taken from the P1.T1.Amnec_Ch4.xls under the RAPM tab.
Asset A - 50%
Asset B - 50%
Covariance (Port, Market) - 0.0135
Beta - 1.062
Expected Return (beta) - 10.4% ( calculated from SML i.e. Rf+Beta*(Rm-Rf)
Expected return (checking) - 12.5% ( calculated by taking Xa*Ra+Xb*Rb)

I am not able to understand the concept of expected return. As in if I own a portfolio with Xa=0.5 and Xb=0.5 what will be my Expected return? What does the Expected return (beta) signify and what does the return (checking) signify?

Thanks
Manas

 

[David Harper CFA FRM]

Hi @Manas31

That is applying the CAPM where E(r) = Rf + β(i, M)*[R(m) - Rf]. Please note that your version contains a mistake (apologies) that I have fixed in the upcoming version: the expected returns must match. Otherwise there is a mistake.

• The Expected return (checking) is simply E[portfolio return] = weight_A*E[return A] + weight_B*E[return B]; i.e., weighted average return of the portfolio
• The Expected return (beta) is the CAPM E(r) = Rf + β(i, M)*[R(m) - Rf], where beta(.) is the beta of the portfolio with respect to the market. I hope that helps!

 

[Manas31]

Thanks David.