Question

UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds which is 4%, has been 7%. The amount you invested in UPS is $60,000 and in Wal-Mart is $140,000. What is the best estimate of expected return on your portfolio?

D) 9.55% |
||

A) 9.74% |
||

C) 9.25% |
||

B) 10.23% |

Answer #1

The Risk free rate = 4%

Average excess return that is the market risk premium = 7%

Now the beta of UPS = 1.1

Therefore Expected return of UPS = Rf + Beta ( Market risk premium )

= 4 + 1.1 (7) = 11.7%

Now the Beta of Wall Mart is 0.7

Therefore Expected Return of Wall Mart =

4 + 0.7 (7) = 8.9%

Now the Weights of investment in UPS And Wall mart are

UPS = 60000 / 200000 = 30%

Wall Mart = 140000 / 200000 = 70%

Now the expected return of portfolio =

= 11.7 (0.30) + 8.9 (0.70) = 3.51 + 6.23 = 9.74%

Therefore Answer is (A) that is 9.74%

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