Question

You own a portfolio that has 5,000 shares of stock A, which is priced at 13 dollars per share and has an expected return of 12.5 percent, and 2,700 shares of stock B, which is priced at 22.1 dollars per share and has an expected return of 7.05 percent. The risk-free return is 3.91 percent and inflation is expected to be 1.27 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Solution: - Given in Question -

Market Value of Stock A = 5,000 shares * $13 = $65,000

Expected Return of Stock A = 12.50%

Market Value of Stock B = 2,700 shares * $22.10 = $59,670

Expected Return of Stock B = 7.05%

Total Portfolio Value = $65,000 + $59,670 = $1,24,670

Risk Free Return = 3.91%

Inflation = 1.27%

To Find - Risk premium of your portfolio-

First, we need to find portfolio expected Return-

Expected Return of Portfolio =

Expected Return of Portfolio =

Expected Return of Portfolio = 0.0989

Risk Premium Of your portfolio:- Expected Return on your portfolio - Risk Free Return

Risk Premium Of your portfolio = 0.0989 - 0.0391

Risk Premium Of your portfolio = 0.0598.

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