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The risk-free return is 5.4% and the market risk premium is 12.3%. What is the expected...

The risk-free return is 5.4% and the market risk premium is 12.3%. What is the expected return for the following portfolio? (State your answer in percent with two decimal places.) Stock Beta Investment AAA 3.8 $500,000 BBB 2.6 $900,000 CCC 1.5 $3,000,000 DDD 1.2 $1,300,000

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Answer #1

Ans 17.87%

Stock BETA Investment BETA * Investment
AAA 3.80 500000.00 1900000.00
BBB 2.60 900000.00 2340000.00
CCC 1.50 3000000.00 4500000.00
DDD 1.20 1300000.00 1560000.00
Total 5700000.00 10300000.00
AVERAGE BETA = (BETA * INVESTMENT) / TOTAL INVESTMENT
10300000 / 5700000
1.807018
Expected Return = Risk free Return + (Market Return - Risk free return)* Beta
Expected Return = 5.4% + (12.3% - 5.4%)*1.807018
Expected Return = 17.87%
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