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Expected Return (beta) and Expected Return (checking)

Thread starter #1
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

David Harper CFA FRM
Staff member
Subscriber
#2
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!

 
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