Hi Folks - This week we are going to use the math for computing a weighted mean and use it to the bombardment portraiture we skilled encircling decisive week, the CAPM. Using a weighted mean, you can touch the expected facilitate and requite of a portfolio of accumulations to tally your peculiar facilitate tolerance. If you keep a accumulation that has a relatively low Beta, you can use it to subdue the overall facilitate of a portfolio, uniform if the requites themselves are not super innovating. For portraiture, if you were to couple Ford after a while another loftier beta accumulation, Ford's low beta would acceleration to off-set the facilitate of the other accumulation. Here is how to calculate the beta and expected requite of a portfolio...
% of portfolio
Contribution to portfolio Beta
Expected Requite (CAPM)
Contribution to Portfolio Return
.50 x 1.03 = 0.515
.50 x .097 = .0485 = 4.85%
.50 x 2.2 = 1.1
.50 x .153 = .0765 = 7.65%
.0.515 + 1.1 = 1.6
4.85% + 7.65% = 12.5%
As you can see, the restoration of Ford to a portfolio containing a facilitateier accumulation abates the overall facilitate of the bombardments and peaceful provides a worthy requite of 12.5%.
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