Question

What is the expected return of a portfolio with two stocks that has 3,900 shares of stock A, which has a price of 30.8 dollars per share and an expected return of 7.98 percent, and 87,800 dollars of stock B, which has a beta of 1.53? The market has an expected return of 13.54 percent, the inflation rate is 1.59 percent, and the risk-free rate is 4 percent. 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

Stocks	Invested Value	Weights
A	1,20,120.00	0.58
B	87,800.00	0.42
	2,07,920.00	1.00
Expected Return of Stock A = 7.98%
Return Stock B computed using CAPM:
E = Rf + beta * (Rm-Rf)
Where,
E	= Expected Return
Rf	= Risk free rate
Rm	= Market return
Eb	= 0.04 + 1.53 (0.1354 - 0.04)
	= 18.6%
Expected return of portfolio is:
Stocks	Return	Weights	Weighted return
A	7.98%	0.58	4.63%
B	18.60%	0.42	7.81%
Portfolio's Expected Return	12.44%