Rachel is a financial investor who actively buys and sells in the securities market. Now she has a
portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and
$5,500 of Share D.
Required:
a) Compute the weights of the assets in Rachel’s portfolio? (2 marks)
b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past
four years, respectively. Calculate the geometric average return of the portfolio for this period. (2
marks)
c) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk
premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation
rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model
(CAPM). (2 marks)