Question

What is the expected return of a portfolio with two stocks that has 3,900 shares of...

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.

Homework Answers

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%

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